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Credit Rating: Car Finance Jargon Busters

So are you wondering what is a "credit rating" and why is this important? 🤔 Terms like credit rating, credit score, and credit report are often mentioned whenever you’re reading about how to get car finance in the UK. For first-time car buyers who want to finance a car, it can be daunting and  confusing trying to understand car finance jargon. However, before signing any loan agreement, it’s really important to be familiar with these terms, so you’re fully aware of what you’re agreeing to. Here, we’ll go in-depth on what "credit rating" means and why it matters when you’re applying for car finance. 

What is a Credit Rating?

Often, the terms credit score and credit rating are used interchangeably. While they are very similar in a lot of ways, there are a few differences. Credit scores are actual numbers representing how good your credit history is. If you have a good record of paying your loans, credit reference agencies will give you a high credit score. As for credit ratings, they can be expressed as numbers and also letters, which may range from AAA to D. Lenders check both credit scores and credit ratings to assess your car finance application before extending credit. 

Are Credit Ratings Important?

Car finance companies may assess either your credit score or credit rating or both before they approve your loan application. Whether they look at your score or rating, what’s clear is that both are important if you want to finance a car. Lenders use them so they can check your past loans and how good you were at making payments on time and whether you can handle your finances responsibly. And what many people might not realise is that if you have a great credit history then you may be offered a lower interest rate - that's really great news!

Does Car Finance Application Affect Credit Rating?

Are you worried that when you apply for car finance, it could negatively affect your credit rating? Well, the good news is that this isn’t something that should stress you out, especially if you’re doing well at managing your finances. When the car finance company performs a hard credit check on your credit report, this might temporarily knock off a few points in your credit score. However, as long as you make your payments on time every time, then getting car finance can actually improve your credit rating. 

Can You Get Car Finance with Bad Credit Rating?

How do you get car finance with poor credit rating? Seems impossible, but even with a bad credit rating, you can still get car finance. It might be a bit harder to find the right car finance company than if you have an excellent credit score, and if you are having difficulty it might be worth trying a credit broker who will know the best car finance companies to try.

Most lenders watch out for applicants with poor credit ratings because they either don’t have enough credit history for lenders to assess or they’ve defaulted on previous loans. Of course, people can improve when it comes to how they handle their financial obligations but lenders evaluate loan applications based on past loan records. 

There are car finance companies that focus on extending credit to people with poor credit ratings but typically, these come with high interest rates since they are seen as high-risk borrowers. To be on the safe side, it’s better to take the time to improve your credit rating first so you’ll be able to get the best car finance deals. 

How to Improve a Bad Credit Rating

Before you apply for car finance, it might be wise to check your credit rating first. If your rating is bad, find out why this is so by looking at your credit report. Do you have missing payments on loans, outstanding debts or county court judgments? If you do, then those are the major reasons why your credit rating is low. Here are some steps you can take to boost your credit rating and improve your chances of getting approved on your car finance application. 

Pay Off Current Debts

This might seem too obvious but paying off your current debts is a crucial step if you want a better credit rating. Doing this won’t improve your score overnight but it’s a good way to show future lenders that you’re committed to your financial obligations. If you continue paying off your loans on time every time, then it will eventually reflect on your credit rating. 

Avoid Multiple Loan Applications

It’s tempting to keep on applying for car finance when one lender rejects you. However, this is not a good move at all because it will hurt your credit rating. Remember that for each application, the lender will conduct a hard search on your credit report. This hard search will be recorded in your credit history, knock off a few points each time,  and other lenders will see that you’ve had multiple applications. It’s a bad thing because you’ll seem desperate to get credit. Avoid multiple car finance applications as much as possible. 

Prepare a Substantial Deposit

While there are zero deposit car finance deals, indeed we offer these here at Carmoola, you might want to consider saving for a substantial deposit instead. By doing so, you won’t have to borrow as much money, pay as much much interest, and this also lowers the amount you have to pay every month throughout the duration of your car finance agreement. While it’s no guarantee that a big deposit will automatically approve your car finance application, lenders will see it as less of a risk for them to extend you credit, giving your application the boost that it needs. 

Takeaway

Having a poor credit rating shouldn’t stop you from applying for car finance. However, to give you the best chances of getting credit, consider taking the time to improve your rating first by paying off outstanding loans and building a good credit history by paying bills on time. Even if it means you’d have to set aside your car purchase for now, the money you get to save by being qualified for a good car finance deal with better interest rates makes this worth it. 

Remember that your credit rating is important in getting car finance and other financing products. It’s never too late to improve a bad credit rating. Start by evaluating your income, expenses, and how much car finance you can afford and see what you can do to get a better credit rating. And if you didn't expect your credit rating to be low, do check all the details in case there are errors that need to be corrected. Don’t forget to try the tips we’ve shared here and share with your friends if they need help too! 👍

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