Can I get car finance if I’m in a debt solution or bankrupt?

If you’re looking to buy a new car on finance, being bankrupt or having a debt management plan can affect your chances of being accepted for credit. But does it mean getting a new car is completely out of the question?

Our guide explains all you need to know about getting car finance if you’re in a debt solution or bankrupt.

What types of debt solutions are there?

Missing repayments on loans or credit cards will affect your credit score. A bad credit score suggests you have little experience in handling credit or you’ve mismanaged credit in the past. In either case, fewer lenders will accept your application as you’re seen as too much of a risk.

But before we take a closer look at car finance for bad credit, let’s take a quick look at the solutions that are available if you find yourself struggling with debt:

• Debt management plan (DMP) - If you miss a number of repayments, you may have to enter an agreement with your creditors to repay the debt. Although an informal arrangement, this can limit your options when taking on credit as it suggests you’re in financial difficulty and lenders will see you as a higher risk.
• Individual Voluntary Arrangement (IVA) - If your debt problems get to a certain point, you may have to take out an IVA. This is a legally binding agreement between you and your creditors and you must repay a certain amount of your debt in regular instalments over an agreed period. Although you can still get credit when in an IVA, your options will be limited as you’re seen as a higher risk. If you need to borrow more than £500 you’ll need to get permission from your insolvency practitioner (IP).
• Bankruptcy - If you can’t pay back your debts, then you may be declared bankrupt, either by yourself or your creditors. Again, you may still be able to get credit but your options will be limited and you must tell the creditor of your bankruptcy if you want to borrow £500 or more.

How will being in a debt solution, or bankrupt, affect your chances of getting car finance?

If you’re thinking of applying for car finance while in a debt solution or bankruptcy, there are a few things you need to consider, such as the affordability of the loan and how it will affect any DMP or IVA repayments. Our car finance calculator can help you with this.

It also helps to understand how it affects your credit score.

How does being in a debt solution affect my credit score?

When you enter a credit agreement, whether a credit card, personal loan, car finance or even a mobile phone contract, you agree to make regular monthly payments until the debt is cleared.

If you miss any repayments, this will have a negative effect on your credit score and your creditor (the company that’s lent you the money) will be in touch to find out what the problem is. If the problem persists, you may have to use a debt solution such as a debt management plan (DMP). This will also negatively affect your credit score as it suggests to lenders that you’re not so good at handling debt.

As your credit score drops, you’ll find you have fewer options when it comes to taking out credit. It also makes borrowing more expensive as lenders put higher interest rates on bad credit loans.

If a DMP doesn’t work, you may need an IVA or even bankruptcy to help clear the debt so you can make a fresh start - both will stay on your file for at least six years. This can limit your options and make borrowing more expensive, until it is removed.

Why is a credit score important when applying for car finance?

When you apply for credit directly from a lender or through a broker like Zuto, a risk assessment is run to help work out whether you’re eligible for credit and, if so, the terms of your finance agreement.

This is done by using the details you provide in your application alongside your credit history. They’ll then look at their own lending criteria before deciding whether they’re happy lending to you.

If you keep up with your repayments and don’t rely too heavily on credit - your score can also be marked down for having less than  50% of available credit on any credit cards - then you should have a good credit score. This not only gives you more options when accessing  finance, it also means you could be eligible for higher borrowing levels and lower interest rates.

But if you’ve missed repayments or handled credit badly in the past, you’ll have fewer options available to you and borrowing could be more expensive. If you have a debt management plan, IVA , or bankruptcy, this will affect your application for credit.

How does a debt solution affect your application for car finance?

The impact a debt solution has on your application for car finance will depend upon type of debt solution you’ve entered into. Let’s first take a look at the effect of a debt management plan.

How does a debt management plan affect your application for car finance?

As we’ve already mentioned, if you’ve defaulted on payments and you're in a debt solution, your credit score will be damaged – there’s really no getting away from that.

However, that doesn’t necessarily mean you can’t get a new car on finance. At Zuto, we specialise in finding car finance for people with a poor credit history. So, even if you find yourself with a very low credit score, you can still apply.

But bear in mind that a rejected application can have a further negative effect on your credit score. This means you’ll need to be able to show lenders that you can keep up with the monthly repayments, remembering to factor in the running costs of the car you’re looking to buy.

Now let’s look at what happens when you’ve been made bankrupt.

Can I get car finance while bankrupt?

If you’ve been made bankrupt, the rules are a little different. When applying, you must declare to any lenders that you’re bankrupt, which means you’re unlikely to be accepted for any borrowing of more than £500.

In short, you can't apply for car finance if you’re still bankrupt.

But once you’ve been discharged from your bankruptcy - usually after a year - there’s nothing stopping you from applying then. But, your credit score will be low and the bankruptcy will still be on your credit file, which means it will be difficult to find a lender and access the best rates – at least until your credit score starts to improve.

Visit our guide on how to improve your credit score.

How to apply for car finance with Zuto

At Zuto, we aim to find a car finance solution whatever your situation. We’ll search our large panel of lenders to  try to help you access the funds you need for a new car.

To find out more about our Zuto hp car finance and personal contract purchase options, give the team a call on 01625 619 944.