Subprime car finance

Having a low credit score needn't lock you out of car finance. Subprime finance means you don't need to find cash for your next car

BuyaCar team
Oct 31, 2020

The calculations behind credit scores are complex, but simple to understand. The higher your score, the more faith lenders have in your ability to pay back money you borrow - and, as a result, the easier it is for you to get finance. But there are plenty of reasons for having a low credit score.

Young people naturally have a lower credit score - as they've had fewer chances to prove their ability to repay what they borrow - as do others who have simply never borrowed money in the past. Missing debt repayments, or having County Court Judgements (CCJs) registered against you are also likely to substantially reduce your score.

Any of these factors can restrict your access to car finance, making it more difficult to spread the cost of your car with affordable monthly payments. And the situation is even worse if several of them apply to you. But fear not; while some lenders may not lend to you and you can expect to pay more interest than someone with an impeccable credit score, it is possible to get car finance and you can work to improve your credit score.

Having a low score usually results in you being charged a higher interest rate than those with a better rating, which increases the overall cost of finance, and you might lose the ability to take out finance without a deposit. Some lenders simply won't offer you finance at all.

But there are lenders who specialise in what's called subprime finance, often offering competitive rates to borrowers with a less-than-perfect credit score, as long as they are able to afford the repayments. Young drivers may also have the option of guarantor car finance, which can reduce your monthly costs if you have a willing friend or relative with a reasonable credit score, who would have to repay the loan if you failed to do so.

If you have time before you need to take out car finance, you can also take a number of simple steps to improve your credit score and improve your future car finance prospects. We've listed some techniques below. You can also read our guide to how to maximise your odds of being approved for car finance for all the details on giving yourself the best chance of getting the car you want for a monthly payment you can afford.

BuyaCar works with a panel of lenders, including subprime specialists. You can get in touch to discuss your options by sending a message, calling 0800 050 2333 or applying for a quote now.

Subprime car finance for buyers with a poor credit rating

Even if you have a low credit score, you'll still have some flexibility in the type of finance that you're offered. As always, lenders will be looking to ensure that you can afford the repayments. These are the most common options:

Subprime PCP (Personal Contract Purchase) finance

PCP finance is the most popular type of car finance and generally available to subprime buyers. Monthly payments are relatively low compared with loans and Hire Purchase because they don't cover the full cost of the car. At the end of the agreement, you have the option of handing the car back or paying the large optional final payment to take ownership of the car.

You may also be able to trade the car in for another one: if it's worth more than the remaining finance balance this would give you a little equity to put towards the deposit on your next one, reducing your future payments. If it's worth less than the balance, however, this is what's known as being in negative equity. Read our guide to PCP for more information on the ins and outs of PCP.

If you have a low credit score, then you're likely to be offered an interest rate that's higher than the one used in representative finance examples, which will increase the cost of your monthly payments, as you have to pay more interest. It's worth bearing this in mind when looking for a car.

No-deposit PCP deals are not usually available for subprime buyers either: you are likely to need to pay at least 10% of your car’s value at the beginning of the deal. That's because the bigger the deposit you put down, the lower risk you are to the finance company.


Subprime Hire Purchase finance (HP)

Hire Purchase is a simple type of finance that allows you to spread the cost of buying a car with a series of monthly payments, plus an initial deposit - though in some cases this can be as little as £0. Once all of the monthly payments are made, you automatically own the car. You can read our full guide to Hire Purchase for more information.

'Conditional Sale' finance is virtually identical and works the same way. Just as with PCP, subprime drivers will face higher interest rates than those with better credit ratings, which will increase the monthly cost of their car. A deposit of at least 10% is likely to be required, too.


Subprime car leasing (also known as Subprime PCH - Personal Contract Hire)

Car leasing is like a type of long-term car rental - where you make an initial payment plus a series of monthly payments to have access to a car, but then have to hand the car back at the end of the contract - but it's rarely offered to subprime motorists. As a result, if you have a particularly low credit score, it's worth looking at PCP finance, which typically offers similar monthly payments to leasing.

PCP also gives you greater flexibility when it comes to handing a car back ahead of time, which may be important if you're concerned that your financial situation could change and you might not be able to afford all the monthly payments. Read our guide to PCH for more information.


Affordable subprime finance

Making car finance affordable with a low credit score may mean finding a cheap car, as the lower cash price means you're borrowing less money and so you get lower monthly payments along with the possibility of a smaller deposit (since the minimum deposit allowed is often a percentage of the cash price).

As with any type of finance, the overall cost will be lower if you put down a larger deposit because you’ll be borrowing less and subsequently paying less interest overall. It's particularly noticeable with subprime finance because the higher interest rates mean that interest charges can account for a larger proportion of monthly payments than finance for those with better credit scores.

Payments on PCP finance are inherently lower than HP finance - as monthly payments only cover part of the initial cost of the car - but you won’t own the car at the end of it, unless you make the large optional final payment, unlike with HP.

One way for young drivers to reduce the cost of finance may be to recruit a guarantor.


Taking out guarantor finance

Young drivers often have access to low-rate finance by using a guarantor.

These are usually relatives who own a home and have a good credit rating. They must agree to make your payments if you fail to do so, which gives the lender additional security, and allows them to lower the interest rates offered, based on the guarantor’s credit score, rather than the driver's lower one.

Keep in mind that the guarantor’s credit rating can be negatively affected if payments are missed. For full details, see our guide to guarantor finance.


Boosting your credit rating

The first step to boosting your credit rating is to ensure that you have taken all of the steps on the checklist below:

  • Register on the electoral roll at your current address
  • Cancel any credit cards or store cards that you don't use
  • Build a history of repaying debt by using a credit card sparingly and repaying the bill in full each month
  • Check your credit file to ensure that the information is accurate

Other factors that improve your credit rating include being in regular employment, spending several years at the same address and paying off your debts, which all indicate stability and less risk for your lender.


Why is subprime car finance more expensive?

Lenders believe that the lower your credit rating, the more likely you are to miss payments on your car, which could leave them out of pocket. As a result, they increase interest rates to account for this.

They also tend to require a sizeable deposit from the start. This helps to ensure that the amount that you owe to the lender is close to the value of the car throughout the agreement. If a buyer does miss payments, then the car can be seized and sold to pay off the debt.



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