How to Get a Car Loan with Bad Credit

If you need a car loan but you have bad credit, there are some important things you need to know before you apply. This article will help you understand how you can increase your chances of getting approved for a car loan if you have a bad credit score.


Are you able to apply for car loans with a bad credit rating?

The simple answer is yes. Theoretically, anyone can apply for a car loan. But there’s a BIG difference between applying for a bad credit car loan and being approved for one. First, it’s important to understand what a bad credit car loan actually is.


Bad credit car loans

A ‘bad credit car loan’ is a blanket term that describes car loans for applicants or approved borrowers who have a bad credit score (also called a bad credit rating).  These are also referred to a ‘sub prime loans’ or ‘non-conforming loans’.

Lenders usually check your credit score when you make any loan application. You mightn’t realise it, but there are credit reporting agencies in Australia that compile credit scores for anyone that takes out credit. Taking out credit can include:

  • borrowing money (for example, taking out loans)
  • getting one or more credit cards (as they give you the opportunity to get into debt)
  • taking out credit accounts like mobile phone plans or getting electricity or gas accounts.

It’s crucial to understand that even applying for credit can negatively impact your credit score. If you’re declined, your credit score will drop further. That means you should avoid applying to multiple lenders for your car loan and hoping that one will approve you. If you do, your credit score will drop with each rejection. That will only make it harder for you to get approved.


How do you get a bad credit score?

There are several ways you can get a bad credit score. The main one is by not making your repayments on time (or at all). We speak with people every week who have defaulted on credit card debts or loans in the past, some are surprised this affects their chances of getting another loan!   Others have been late on a few repayments in the last two years, and didn’t realise this also affects their credit score.  It does!

Other ways to hurt your credit score include:

  • making payday lender enquiries

payday loans are short-term, high interest loans. Applying for (or having) one of these loans  is a signal that you’re struggling to make ends meet between paydays. They will harm your credit score in a similar way to making too many credit or loan applications.

  • maxing out your credit card

If you consistently spend up to your credit card limit and you only make the minimum monthly repayment (or worse, no repayment at all), this is also a sign that you’re struggling to make ends meet. It can also be a sign that you’re a bad manager. Either way, it will negatively affect your credit score.

And of course, making too many credit applications and having them rejected can make your credit score worse (as mentioned earlier).


What is a bad credit score?

The three main credit reporting agencies in Australia (Experian, Illion and Equifax) all calculate their credit scores slightly differently. Experian considers a credit score below 550 to be “below average”. That’s a polite way of saying “bad”.

Equifax is the reporting body used by most lenders.  Equifax considers any score below 505 to be “below average”, while Illion classifies any score below 500 as “room to improve”. Again, that’s a polite way of describing a bad credit score.

Average credit scores across the three agencies range from 500-699. From there, good to excellent scores range from 700  to a maximum of 1,000 – 1,200, depending on the agency.

You can check your credit score with any of these agencies for free. It’s worthwhile to do that so you know where you stand before you apply for a car loan. If you discover that your credit score is bad, it probably won’t come as a surprise to you. But you should take steps to improve it before you apply for a car loan to increase your chances of approval.


What happens if you have a bad credit score?

If you have a bad credit score, one of two things will happen when you apply for a car loan:

1) your application will be rejected. OR

2) you’ll be offered a much higher interest rate

The lender will need to be compensated for the increased risk in lending to you.  Depending on how bad your credit score is, and how your score on the Lender’s credit criteria, your interest rate could be anywhere from 7% to 29%.


You should always use the comparison interest rate when looking at car loan products. It includes both the interest rate and any other lender fees. It therefore shows the total cost of the loan.

There are usually two interest rates on any loan. The comparison rate and the nominal rate. The nominal rate is the lower one and it only includes the interest rate, not any lender fees. Don’t be misled by a lower nominal rate. Look for a car loan with the lowest comparison rate instead.

Even a 1% difference in interest rates can result in you paying more than $1,000 in interest over the life of your loan.


How to help your approval for a car loan with bad credit

One of the best things you can do if you have a bad credit score is to take some simple steps to improve it both before you apply for a car loan and after you have it approved.

You should aim to do both of these things. Improving your score before you apply will increase your chances of approval. Improving your credit score after you’re approved will make it easier for you to be approved on better car loan terms and conditions in the future. It will also increase your chances of being approved for any type of future loan or credit.


How can you improve your credit score?

Ways to improve your credit score include:

  • paying any overdue debts that you have ASAP.

This gives lenders more confidence that you will repay future debts.  Having ‘paid defaults’ rather than ‘unpaid defaults’ will definitely help your credit score over time.


  • make all your current and future repayments on time (including your car loan repayments).

This will be noted by the reporting agencies under Australia’s comprehensive credit reporting regime that was introduced in 2018. Previously, reporting agencies only focused on late or missed repayments in calculating your credit score. Now, positive repayment information is also reported, making it easier to improve your score if you make all your repayments on time.


  • don’t make any unsuccessful credit or loan applications

As mentioned earlier, this lowers your credit score.  Try not too take on too many loans or make too many inquiries.


  • refinance your existing high interest debts into a single, lower interest loan

This is another way of lowering your repayments and making your finances easier to manage. Instead of having to remember to make multiple regular repayments, you’ll only need to make a single lower repayment to cover all your debt. That’s because you won’t be charged as much interest.  This option is subject to getting approval from a lender of course.


  • maintain a stable address.

Lenders like to know how they can get in touch with you. Having a stable, recorded address is a way to demonstrate to them that you can.


Can I get a car loan with bad credit?

Of course, you might not have the time to improve your credit score before you apply for a car loan. After all, having a car is pretty much essential for everyday living. The main options for taking out a car loan with bad credit are outlined below.


  • Taking out a secured loan

A secured loan requires you to provide security (called collateral) to the lender. Collateral is an asset that the lender can repossess and sell if you don’t make your repayments. If you have bad credit credit, a lender will almost certainly want you to take out a secured loan with your car as the collateral. That means they will be able to repossess and sell your car if you don’t make your repayments.


  • Getting a guarantor loan

A guarantor is a person (usually a family member) who agrees to make your repayments if you don’t. The guarantor should have a good credit rating to lower the lender’s risk and make it more likely you will get your car loan approved.


  • Dealer finance

Dealer finance is arranged by the car dealer selling you the car. Some dealers may be prepared to offer bad credit car loans, but most are not able to.


You should seek the advice of a car finance broker about your options. They will know which lenders would be most likely to approve your application. That’s because they are specialists and they understand the different lending criteria of different lenders in the Australian car loan market.  A broker will not waste your time and hurt your credit scores by applying with a lender which -based on their internal credit policies- was never going to approve your loan. A good car finance broker will help you find a great deal for your specific situation and also help you with your loan application.


How to make a bad credit car loan application

The most important thing to demonstrate to a lender during any loan application is that you are low risk. That can be challenging to do if you have a bad credit score, although taking out a secured loan or getting a guarantor will certainly help.

Demonstrate servicing capacity: You should also put your best foot forward by being able to demonstrate you’re your after tax income is enough to ‘service’ the loan after all your essential living expenses have been paid. There are two ways to demonstrate this:

1) by increasing your income (which can be hard to do in the short-term, unless you get a higher paying job or a second job).

2) by reducing your expenses (which can be easier to do in the short-term). All of us have both essential and non-essential expenses.

Essential expenses include things like food and rent or home loan repayments. Non-essential expenses include things like entertainment and holidays. You should aim to minimise or eliminate your non-essential expenses when you do a budget. This will give you more income to meet your loan repayments.


Demonstrate Savings:

Bad Credit lenders will often want to see your bank statements.  If you have at least 3 months of steadily accruing savings in your bank account, that is obviously going to look a lot better to a lender than showing an account that often maxes out several times a month, needing payday loans to get you to the next payday.


Demonstrate Responsible spending:

If a lender reviews your bank statements and sees a bunch of gambling spending or payday loans, it is going to harm your chances of getting approved.  Stop wasting your money and start saving instead!

Demonstrate Stable Employment:

If you’ve been in and out of casual jobs in different industries, your chances of getting a loan are much lower because the lender isn’t confident you’ll stay employed.  Try to keep a steady track record of employment, stay in the same industry for at least 3 months before making a car loan application.  If you are full time employed and are outside your probation period, your chances of getting approved are much higher.

A finance broker will help take you through all the documents required for your bad credit loan application and will be able to help you submit it to the best lender.

Car finance on Centrelink

Some lenders will assess Centrelink payments as part of your income when assessing a car loan application, while others won’t. To avoid wasting a lot of time, you should talk to an experienced car finance broker if you’re receiving Centrelink payments and you need a car loan. They will be able to advise you which lenders will include that income in your loan application. You will have more borrowing power and a higher chance of being approved by lenders that do.

Centrelink payments that some lenders will be prepared to accept include the:

Guaranteed car finance no credit check no deposit

Yes, it’s possible to get car finance with no credit check and no deposit. However, it’s easier to find lenders that will approve a car loan without a deposit than it is to find one that will approve one without a credit check. This is very rare and those that do will inevitably charge extremely high interest rates!   Your best bet is to just assume a lender is going to know your full history before they lend you money, this means you may have to prepare to pay a higher interest rate if you’ve had problems in the past.


Dealerships that accept bad credit

You should be very wary of car dealerships that arrange finance for bad credit applicants. Dealer-arranged finance almost always has higher interest rates than you can get elsewhere. Even a small difference in car loan interest rates and fees can make a BIG difference to how much you have to repay each month, as was shown in the table earlier in this article.


The bottom line

As you can see, having a bad credit score doesn’t mean that you won’t get approved for a car loan in Australia. But it’s important that you fully explore your options so you can make a smart car loan decision. After all, you don’t want to get yourself into any further financial trouble.

Having a bad credit score means you will be paying higher interest rates.  But the good news is this doesn’t have to last forever.  If you can make your repayments on time, start saving money and stop making too many loan inquiries then even in two short years your credit score can improve dramatically!


How we can help

If you have a bad credit score and you need a loan to buy a new or used car, talk to us at Auto Car Loans.  We’ll help you to explore your options, find you a great deal and help you with your car loan application.

Don’t use dealer-arranged finance or try to arrange your car loan yourself. If you do, you’ll either increase your chances of having your application rejected, or you’ll end up paying a lot more. We arrange car finance for a living, and we can save you money, time and hassle. We work for our clients, not for lenders.

Get in touch with one of our expert car finance brokers by calling 1300 301 051 during business hours.

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