Car Loans With Bad Credit or Defaults: What Lenders Look At
Can you get a car loan with bad credit or a default? What lenders look at, how long defaults stay on your file, and what to expect on rates and fees.
The short answer
Yes, it is often possible to get a car loan with bad credit or a default on your file, but from fewer lenders, usually at a higher rate, with higher fees and a lower maximum loan. Specialist lenders look at the reason for the problem, how long ago it happened and how you have managed your money since.
Some situations are much harder to finance: a default listed in the last few months, several unpaid defaults, or being currently bankrupt or in a debt agreement. In those cases waiting, or fixing what you can first, may get you a better result.
What counts as bad credit
Your credit report records your credit history. The items that most affect a lender's decision are:
- Defaults: an overdue debt of $150 or more that is 60 days or more past due can be listed as a default, after the creditor has notified you.
- Repayment history: whether you have made loan and credit card repayments on time each month.
- Credit enquiries: each credit application you make is recorded, and many applications in a short period can count against you.
- Court judgments, bankruptcy and debt agreements.
A low credit score without any defaults is different from bad credit. Many mainstream lenders will consider a lower score on its own, and our comparison tool treats it as a separate "Low" category.
How long negative information stays on your file
Australian credit reporting rules set fixed periods for how long information can stay on your credit report:
- Defaults: 5 years, even after you pay them. The listing is updated to show it is paid.
- Serious credit infringements: 7 years.
- Credit enquiries: 5 years.
- Repayment history: 2 years.
- Financial hardship information: 1 year.
Bankruptcy and debt agreements stay for longer periods that depend on their dates. A correctly listed default cannot be removed early just because you have paid it. If a listing is wrong, you can ask the credit reporting body or the credit provider to correct it.
What specialist lenders look at
Lenders that consider bad credit look past the score to the story:
- How old the default is, how much it was for, and whether it is paid. A paid default from two years ago is viewed very differently from an unpaid one from last month.
- What kind of debt it was. A phone or utility bill is often treated more leniently than a defaulted car loan.
- Your recent bank statements: steady income, no dishonoured payments and no reliance on payday loans.
- How long you have been in your job and at your address.
- A deposit, which reduces the amount the lender has at risk.
Each lender sets its own rules, so one may decline an application that another would approve.
What it costs
Bad credit loans cost more because the lender is taking more risk. As an illustration, on a $15,000 loan over 4 years with no fees:
- At 9.5% p.a.: about $377 a month, about $3,089 in interest.
- At 22% p.a.: about $473 a month, about $7,684 in interest.
Bad credit lenders also tend to charge higher establishment and risk fees. Always look at the comparison rate and the total amount you will repay, not just the weekly repayment. For consumer loans, the National Credit Code generally stops non-bank lenders charging more than an annual cost rate of 48%, including fees, so rates and fees well above the examples here should be a warning sign.
Improving your chances
- Get a free copy of your credit report so you know exactly what lenders will see, and fix any errors.
- Pay or set up an arrangement for any outstanding defaults. The listing stays, but a paid default looks better.
- Avoid making several applications at once. Each one adds an enquiry to your file.
- Keep your bank account in good order for a few months: no dishonours and no payday loans.
- Save a deposit if you can, and choose a car that keeps the loan modest.
Our comparison tool has a "Bad credit" option that shows indicative options from lenders on our panel that consider defaults. A broker can then look at your full situation before anything goes on your credit file.
Frequently asked questions
Can I get a car loan with a default?
Often, yes, especially if the default is paid and more than 12 months old. Specialist lenders consider defaults, usually at higher rates and fees and with lower loan limits.
Does paying a default remove it from my credit report?
No. A correctly listed default stays on your report for 5 years from the date it was listed, but it is updated to show it has been paid, which lenders view more favourably.
Will applying for a car loan hurt my credit score?
A formal application is recorded as a credit enquiry, and several in a short time can affect your score. Comparing options on our website involves no credit check, and we start with a soft check that does not affect your score.
Can I get a car loan while bankrupt?
It is very difficult while you are bankrupt. Some specialist lenders consider applications after discharge, often with conditions such as a clean record since then.
Sources
This guide is general information only. It does not take into account your objectives, financial situation or needs, and it is not credit, tax or legal advice. Tax and GST outcomes depend on your circumstances, so confirm them with your accountant. All finance is subject to lender approval, terms and conditions, and fees and charges apply.
Related reading
Related service: Car loans
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