Can you get a car loan with bad credit?

The short answer is often yes. Bad credit doesn't automatically rule you out of a car loan. It does tend to narrow your options, and it can make finance more expensive. Understanding what lenders look at, and what you can do to improve your position, can make a real difference to the outcome.

What counts as bad credit?

There's no single definition, but lenders generally consider things like:

• A low credit score from one of Australia's credit reporting bodies
• Defaults listed on your credit file, such as an unpaid phone or utility bill
• Late or missed repayments shown in your repayment history
• Lots of recent credit enquiries, which can suggest you've been applying widely
• Court judgments or debt agreements
• Past bankruptcy, whether discharged or current

Some people have a thin credit file with very little history. That isn't the same as bad credit, but it can create similar hurdles.

How lenders assess bad credit applications

Mainstream banks tend to be quite strict. If your file shows recent defaults or a low score, an automated system may decline the application early. Specialist lenders, sometimes called non-bank or second-chance lenders, take a different approach. They may look more closely at the story behind your credit history and your current situation.

Things they commonly weigh up include:

• Your current income and job stability. A steady job held for a decent period helps.
• What happened and when. A default from four years ago that has since been paid reads very differently to one from last month.
• Whether debts have been paid. A paid default is generally viewed more favourably than an unpaid one.
• Your recent conduct. Twelve months of on-time bill and rent payments can help show things have changed.
• Your deposit and the car. A sensible car and a deposit can reduce the lender's risk.

What to expect

Bad credit car loans can come with:

• Higher interest rates than standard car loans
• Lower maximum loan amounts
• Stricter conditions on the age or type of car
• Requests for more documents, such as bank statements and payslips
• Higher fees in some cases

Be cautious of anyone who promises approval regardless of your history. Lenders in Australia must assess whether a loan is suitable and affordable for you, so no legitimate lender can promise approval before looking at your situation.

Steps that may improve your chances

1. Check your credit report first

You can request a free copy of your credit report from Australia's credit reporting bodies: Equifax, Experian and illion. Check it carefully. Errors do happen, and you can ask for incorrect listings to be corrected.

2. Deal with outstanding defaults

Paying an outstanding default won't usually remove it from your file, but it will show as paid, which lenders tend to view more favourably.

3. Avoid applying everywhere

Each application can leave an enquiry on your credit file, and a string of applications in a short time can look like financial stress. It's generally wiser to get guidance first and apply once, with a lender that's more likely to suit your circumstances.

4. Save a deposit

Even a modest deposit shows you can save and reduces the amount you need to borrow. On a $20,000 car, a $3,000 deposit means borrowing $17,000 instead of the full amount.

5. Choose a sensible car

A reliable, reasonably priced car that suits your needs is usually easier to finance than a high-end vehicle. You can always upgrade later, once your credit has improved.

6. Reduce your other debts

Paying down credit cards or closing limits you don't use can improve your borrowing position. If you're juggling several debts, debt consolidation may be worth exploring, although it isn't right for everyone.

7. Consider a guarantor

Some lenders will consider a guarantor, usually a family member, who agrees to be responsible for the loan if you can't pay. This is a serious commitment for them, so make sure everyone understands the risks and gets independent advice.

An example

Josh had two defaults listed three years ago after a period out of work. He has since paid both, has been in a full-time job for 18 months and has saved $4,000. He wants a reliable used hatchback for around $18,000.

A major bank might decline Josh based on the defaults alone. A specialist lender, however, might consider that the defaults are paid, his employment is stable and his recent banking shows consistent saving. He may be able to borrow around $14,000 secured against the car, although the cost is likely to be higher than for someone with a clean credit file.

Over time, making every repayment on time can help Josh rebuild his credit, which may open up more options when he next needs finance.

What to avoid

• Applying for multiple loans at once. This adds enquiries and can make things harder.
• Taking on repayments you can't comfortably afford. Missing repayments on a new loan will set your credit back further.
• Signing without reading the contract. Check fees, the total amount payable and any balloon.
• Leaving things out. Lenders will see your credit file, so being upfront usually works better.

If you're struggling with an existing loan, contact your lender about hardship options, or call the National Debt Helpline on 1800 007 007 for free financial counselling.

Getting help with a bad credit car loan

Finding a lender with a less-than-perfect credit history can be confusing. The Finance Club can connect you with a specialist broker from our partner network who works with bad credit finance. They can look at your situation, explain which lenders may consider your application and help you avoid unnecessary credit enquiries.

You can read more about car loans, look into pre-approval before you shop, or start an enquiry when you're ready.

This article is general information only and does not take into account your objectives, financial situation or needs. Speak to your broker, and your accountant where tax is involved, before making a decision.