Bad Credit Car Loans

Your credit may be bad, but there are options to get a car loan – our guide explains what you need to know to help maximise your success

Updated 19 February 2022

Know this first: Each car loan company has a unique lending policy – many are tough on applicants with bad credit, which means getting a car loan approval can be difficult to arrange. Generally, applicants with bad credit have difficulty obtaining car loans from banks and top-tier finance companies. This means that standard options involve higher interest rates and upfront fees. Our guide explains the options you have, and what you can do to maximise the chance of application success.

Our guide covers:

Can you get a car loan with bad credit?

Lenders assess a range of factors when deciding whether or not to approve a car loan. Having a history of credit defaults will almost certainly count against your application. Still, if you can prove a regular income and that you can afford repayments, there is a higher chance of success. Generally, car loans are approved (or declined) based on affordability.

The best place to start is to review your credit history. You can do this for free – our Credit Score explains what you need to know. Once you obtain your history, the next step is to challenge anything that you believe is incorrect.

If I have bad credit, will I pay more for a car loan?
It depends, but in most cases, the answer is yes. Lenders don’t like risks, and bad credit history is the biggest risk when assessing a loan application. For this reason, lenders tend to charge riskier borrowing a higher interest rate.

Warning - Add-on Insurances: Car Lenders may offer you Mechanical Breakdown Insurance (MBI) and/or Guaranteed Asset Protection Insurance (GAP). We do not believe these policies offer value-for-money or cost-effective protection for most people. Our guides to both of these insurance options explain what you need to know. You may be encouraged to buy MBI and/or GAP insurance, but they are not compulsory with any car loan. Our view is that buying add-on insurance makes a car loan more expensive.

How are car loan applications assessed?

By law, lending must be suitable and affordable. If you apply for a $10,000 car loan with a 15% p.a. interest rate and the repayments are $110 a fortnight for five years, this may appear affordable on the outset. However, if your after-tax income is $1,000 a fortnight and housing costs are $800/fortnight, then the car repayment seems less affordable.

Beyond your credit history, many factors are assessed as part of your application, including:

Income and expenses: What matters most is disposable income; in a nutshell - can you afford the loan? If you are applying for a car loan as a couple, then both incomes will be assessed. Car loans usually default when there’s no money left after payday to make the repayments. For a lender to be comfortable, they will need to see evidence of your expenses such as housing, food, debt repayments and other essentials. Supplying bank statements is the best way to do this.
Other debts: This is a significant factor, as it directly affects how affordable your car loan will be. If you owe a lot of money on credit cards, personal loans and store cards, then your chances of being approved for a car loan will be reduced if repaying your existing debts take up too much disposable income.

Know this: Car loan assessments look at all factors together, so even if you have a poor credit record, if you have a high income and minimum debts, your loan may still be approved. It depends on the lender and how much you’re looking to borrow as affordability is the major contributor.

What type of car loans are available to people with bad credit?

The best approach to minimise rejections and avoid lenders (potentially) making a note on your credit history that you’re applying for a loan is to target those who are most likely to approve your application.

To do this, we explain the different lender types below and outline the likelihood they’ll approve someone with bad credit. We assume that all bad credit car loans are approved on a secure basis, meaning that if you fail to repay, your car will be repossessed by the lender.

Bank car loan (secured)

Banks are stringent when it comes to personal lending and don’t like taking risks. An applicant with bad credit is often seen as having a high risk of default. For this reason, banks are unlikely to approve a car loan application.

Further information: Our guides to Best Car Loans and Car Finance both outline leading offers from banks and top-tier finance companies

Finance Companies and Alternative Lenders

Like banks, lenders like Harmoney, Squirrel and Lending Crowd have strict lending criteria. However, they also accept applications from credit-challenged people. Harmoeny is one lender which offers a range of interest rates up to 30% p.a. to serve borrowers with a history of bad credit. You will likely pay a higher interest rate compared to a bank, but the chances of application success are higher.

Options we suggest: Squirrel Money, Lending Crowd and Peer to Peer Lenders

Credit Union car loan (secured)

Credit Unions are, in many instances, less strict than banks and lend to clients with a broader range of income levels. Popular examples include First Credit Union and NZCU Baywide and NZCU South. You will likely pay a higher interest rate compared to a bank, but the chances of application success are higher. Further to this, First Credit Union is an example of a lender which doesn't charge lending fees, which brings down the total cost of borrowing.

Further information: Our guides to First Credit Union and NZCU Baywide and NZCU South.

Dealer Finance (secured)

Warning: This can be more expensive than you think. Car salespeople conduct the same lending assessments as any other lender does. If you are approved, you’ll likely:

Be offered an above-market interest rate,
Have a requirement to pay an upfront fee and,
Possibly have to pay a lender introduction fee (as car salespeople fund your loan with a third-party lender, who they ‘introduce’ you to).

Our view is simple – dealer finance can offer some of the worst interest rates and fees in the market. Furthermore, there’s little opportunity to compare the offer unless you’ve obtained quotes from other lenders before.

Specialist ‘bad credit’ car loan companies (secured)

New Zealand isn’t short of ‘bad credit, no problem’ lenders. However, if they do approve you, the loans often charge high-interest rates and fees, as well as steep penalties if you're late with repayments. For these reasons, it’s best to explore all options before going with a specialised bad credit lender as the repayment costs can become very expensive.

We've not linked to any specialist bad credit lender as we believe there are better alternatives.

Guarantor car loans (secured)

This is a loan where someone you know (a family member or friend) agrees to guarantee the loan until it’s repaid. If you fail to repay the loan, the lender will chase your guarantor for payment, who usually agree to pledge some security such as their car or home. The biggest problem with these types of loan arises if you fail to repay. If this happens, the relationship between you and your guarantor will likely be damaged as the lender chases payment.

Further information: We suggest becoming familiar with this guide (it's aimed at guarantors, but explains how the process of guaranteeing a loan works). Max Loans is one of many speciality lenders offering guarantor car loans.

Car Yard Pay-Per-Week

These setups are common all over New Zealand. It works like this – the car yard has a range of cars for sale. You can either pay upfront in cash or enter into a per-week or per-month repayment plan.

There is a risk that some car yards overprice their cars and extend the weekly repayments to make the car loan ‘affordable’, but this can end up costing you a lot more in the long-term. For example, paying $80/week for three years adds up to around $12,500. If the car is only worth around $6,000, this can be a costly option.

Our view is simple – don't get sucked in to an expensive car loan by agreeing to 'affordable' weekly repayments. It's best to know exactly how much your car would cost using Autotrader.co.nz, Driven.co.nz and Trade Me.

How to Apply for a Bad Credit Car Loan

It’s not impossible to be approved if you have bad credit and a little preparation will help your chances significantly.

Verify your credit history: Our guide to credit scores (LINK) explains how to obtain your credit history. You can then challenge anything that you believe is incorrect. If it is correct yet looks problematic, you are most likely to wait until things improve.
Check the lender’s eligibility: There’s no appoint in applying for a car loan when the lender specifies interest rates of between 5% and 10% p.a. etc. as this would strongly suggest the target customer are those with excellent credit scores. If you’re in doubt, contact the lender. Our list of X bad credit car loan lenders (LINK) suggests a few places to start with.
Organise your documents to support an application: Every car loan application will need pay slips, bank and credit card statements and other evidence to prove your financial situation.
Minimise ongoing costs: Lenders assess affordability alongside your credit history, so reducing ongoing expenses is essential to prove you can make the repayments week after week, month after month. Our ways to save guide (LINK) outlines 20+ ways to eliminate costs with minimal disruption to your life.
Apply with your preferred lender: Shortlist the most suitable lenders and apply with your favourite. If you have any concerns, talk to a budget advisor – the Citizens Advice Bureau (LINK) is a useful starting point and have locations all over New Zealand.

Bad Credit Loans – Frequently Asked Questions

Bad credit car loans can be problematic and confusing - we've listed the most common concerns and queries below.

What interest rates are charged on bad credit car loans?

It depends on the lender. We estimate that a starting point will be around 15% p.a. plus fees. How much deposit you can contribute and how affordable the repayments are will influence the interest rate.

Can I buy a used car if I have bad credit?

Yes, subject to lending criteria being met. The interest rate and fees you’re charged will depend on the affordability of the loan. What matters most is your income and other debt obligations; if you can afford the repayments, you have a higher chance of the car loan being approved.

Can I get a car loan if I have unpaid defaults?

This is less likely, as you will be seen as a high risk to a lender. The best thing you can do here is to sort out your existing debt(s) and arrange for them to be repaid. If this unlikely to be possible, it may be worth considering a Debt Repayment Order (DRO) or No Asset Procedure (NAP).

Can I get finance pre-approval before I look for a car?

Yes – this is often a better way to avoid getting a bad deal at a car yard or rushing without comparing once you have found a car you like. By applying in advance, you can shop around for the best deal.

How long does a car loan application process take?

If you supply all of the required documents and information, a standard application should be processed within two to five working days. However, delays will be caused if you miss out details or are asked to submit further evidence. The best way to avoid delays is to carefully answer an application form and submit supporting evidence at the same time.

How much deposit should I put down on a car loan?

The higher the deposit, the better the chance of a loan being approved. It shows the lender you have money and decreases the risk of default. Because cars drop on value, they are of enormous risk to a lender as what you owe may be worth more than the car if you stop making payments—the less risky the loan, the better the interest rate.

Is a guarantor loan a good alternative for buying a car?

It can be, but you’ll need to have a good relationship with a guarantor who can support you and ensure you prioritise repayments. If you don’t repay, the debt passes to them, which means there’s less risk for the lender, but the guarantor becomes responsible for settling the debt in full. Our view is that guarantor loans require a lot of trust between the borrower and guarantor, and if there is a default, later on, the personal relationship often sources. If you’re not prepared to lose a friendship or family relationship over a car, then guarantor loans may not be suitable for you.

Related Guides:

Best Car Finance

Popular Comparisons

Popular Guides

Car Loan Insurance