When It’s Time to Replace Your Car But You’re Cash-Strapped and Credit-Poor

Even the most solidly built and best-maintained car will eventually wear out, and the day will come when you need to replace yours. Maybe that time is quickly arriving for you, and you’re in a panic, wondering just how you’re going to pay for your next set of wheels. Or perhaps you’re thinking of buying your first car but don’t think you can afford it. Either way, the first step you might consider taking, as strange as it may sound, is to figure out if you really need a car.

After all, millions of people live without cars, and some even do so from choice rather than necessity – and they say their lives are the better for it. Obviously most people who live in rural areas or other spots with little or no public transport probably need a car. But there are many others who may simply be hooked on the convenience of hopping into the car for every little errand, even if they could easily walk, bike or take public transport to their destination. The Money Advice Service offers some great tips on deciding whether or not you can manage without a car, as well as links to resources that will help you do just that.
We’re certainly not here to try to talk you out of buying a car; we simply want to offer suggestions that might help you save money and reduce some stress in the bargain. But if you really do need a car – and you have no cash and a bad or nonexistent credit history – you still have a few obstacles to overcome.

Credit does matter

Like it or not, your credit history, or lack thereof, affects many areas of your life for better or worse. Whether you’re buying a car, purchasing a home or trying to fund a new business, your credit rating matters. And understanding your credit score – much less updating and correcting any errors on it – can be a daunting process.

It might seem logical to assume that if you have never had a credit card or taken out a no credit check loan, your credit score would be untarnished, but that isn’t the case. Ironically, having no credit history at all can be more detrimental to your efforts to get a loan than having had a couple of bad marks on your credit report. And the lower your credit score, the more difficulty you’re likely to have not only in getting approved for a loan or a card, but of getting insurance or a job, as well. Even if you can manage to get approved for a loan, a low credit score will almost guarantee that the loan will cost you more in interest, fees, and penalties than the same loan would cost someone with a higher score.

“Can I still buy a car if my credit rating is lousy?”

The short answer to this is yes, but with a few caveats. Many if not most lenders have their own internal system that allows them to take your personal circumstances into account, adjusting your score upward for their purposes. This allows them to approve loans that might be disapproved by another lender that bases its decisions strictly upon the hard data in the credit report.

One factor in your favor is that a car loan is secured by the value of the car. If you default on such a loan, the lender can seize the car and sell it, applying the sale price against your outstanding debt. Unfortunately, the price at which the lender sells your car is likely to be less than what you still owe, meaning that you are still on the hook for paying the difference, as well as any penalties and fees, such as legal fees and their cost of physically taking possession of the car.

You will need to shop around for the best deal on a loan, just as you would shop around for the best deal on the car itself. Learn as much as you can about lenders before you start filling out applications, however, because every time you apply for credit, the application appears on your credit report. And if your report lists multiple applications for credit, your overall score will be driven even further downward.

New car or used?

One more point: You need to decide whether a new or used car will be a better value for you, and again the Money Advice Service offers a wealth of information to help you make the right choice. On 5 March 2016, AOL UK published an article titled, “New car or used car – which is better value?”, which summarises and links to the Money Advice Service’s information about the subject.

Clearly if you have perfect or near-perfect credit, you have more – and generally better – choices than someone with bad credit when it’s time to make a major purchase for which you can’t pay cash upfront. So while you’re shopping for your next set of wheels, or even before it’s time to do that, make a commitment to do everything you can to boost your credit. You will save yourself a lot of headaches – and a lot of money – in the long term.

Emu.co.uk is NOT a direct lender and our loan-matching service is free to use. We don't charge a fee, but there might be a charge from some lenders within our network. Emu is a trading style of Ready Money Capital Ltd. Emu.co.uk does not make lending or credit decisions, we are not a lender - as a broker we match customer's loan applications with lenders in our database depending on the information provided. Ready Money Capital Ltd is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register under reference number 802557. Licensed by the Information Commissioners Office (registration number ZA441875).

Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk. Emu is a broker, not a lender, and does not make credit decisions.