Bad Credit Car Loans Explained

People who have a bad credit score sometimes turn to pension loans when they need to borrow for a new car. This may be because there are no credit checks involved, as it is a loan against your pension. This is in contrast to the growing concerns about “sub prime” car loans, a problem we have reported before. In April, the FCA started investigating what it called “irresponsible” lenders – those who give car finance deals to people who have bad credit records or who cannot afford the payments. This will be especially problematic if interest rates rise in the near future, as seems likely, which would increase the monthly payments needed to pay back the loans.

Autoexpress reports on how the practice works –

“But how does the bad credit car finance industry work, what are its dangers, and what are some of the things to check before signing on the dotted line for that car loan? We’ve put together the following tips and advice to help you understand the pitfalls of subprime car finance… A subprime loan is simply a loan made by a lender to a party who may have more difficulty maintaining the repayment schedule than the average car buyer. In car finance there’s not a single cut off point that means a buyer suddenly becomes ‘subprime’. And while there are specific subprime car finance providers, subprime loans can also be obtained through mainstream lenders… There are several factors that could lead to a borrower being considered ‘subprime’ by a lender. These include a lack of credit history, previous and excessive debt, previous failures to pay debt, bankruptcy and other caveats corrosive to a person’s credit score. Any one or combination of these factors could lead to someone being refused car finance and as avenues to finance a new car close off, buyers can be funnelled towards finance deals and lenders designed to cater for subprime customers.”