A larger deposit is not always enough to qualify for lower interest rates on your car. A lender will look over your credit report and financial circumstances to assess the level of risk. A higher down payment cannot offset the negative trails of missed payments on your credit file, and hence, the chances of qualifying for lower interest rates are bleak. However, this may be a scenario even if your credit report is excellent. Your low income can make you sceptical, and as a result, you will be charged a higher interest rate.

• If your credit rating is not up to snuff, you may be asked to arrange a guarantor with a good credit rating.
• A guarantor can be your family member or a third party who will promise to repay your car loan in case of a default.

A few things to note down about a guarantor:

• A third party will not agree to act as a guarantor, especially if they are fully aware of the damaging impact of being a guarantor.
• If your family member serves as a guarantor, your default will pull their credit points as well despite the full settlement of your loan by them.

Before arranging a guarantor, you should carefully research what financing option you are choosing. Dealership financing can be more expensive than an auto loan from a direct lender. You should get quotes from multiple lenders and compare rates. Advanced research can help you choose the best deal. Remember that most car lenders will give you a car loan instant decision based on the financial details you provide to them. The actual rates will differ because a thorough check will be conducted.  

The lender’s policy matters in deciding the approval of lower interest rates

It is quite challenging for you to take out a loan when you have a bad credit rating. Most lenders will refuse you, and if you manage to get the nod, you will be charged either high interest rates or restricted to borrow a larger sum. In many instances, your application will be subject to both scenarios. Therefore, a guarantor can come in handy.

Because they will have a good credit score, they are more likely to get approval for affordable interest rates.

Bear in mind those rates are unlikely to be close to what you get with a good credit rating, which means arranging a guarantor does not guarantee that you will be approved for the most attractive rates.

In fact, some lenders may refuse you a loan despite the guarantor. Just because the guarantor has a good credit file does not mean that your lender will be willing to offer you a good deal. They will check your and the guarantor’s financial circumstances.

Ways to qualify for lower interest rates

Here are the ways to qualify for lower interest rates when your credit rating is not so good.

• Buy a secondhand car

Your lender will charge high interest rates when they find that there is a huge risk of committing a default. You can improve your chances of being approved by buying a secondhand car. One of the greatest benefits of buying a car is that it will lower the total cost of your loan.

Because you will be arranging at least 20% of your car’s sticker price as a down payment, your loan-to-value ratio will be lower. Even though high interest rates are charged, you will be paying a lot less money in total.

However, you will have to be very careful at the time of buying a secondhand car. Make sure it is in good condition; otherwise, it will cost you money in the long run. It becomes more important when you are looking for dealership financing. Personal contract purchases impose some restrictions on mileage. When you cross that mileage limit, you will end up being charged more money.

• Use a co-applicant

Arranging a guarantor is not a cinch. Hardly will anyone be willing to act as a guarantor because they will lose their credit points after you make a default. You should apply with a co-applicant who has a good credit rating. A co-applicant is usually your family member. However, there are still some formalities that you need to meet.

Your lender will consider the income sources of both parties. Make sure you are in a favourable position only when your co-applicant has a good credit score. Applying with a co-applicant differs from applying with a guarantor.

A guarantor does not become a car’s owner. They are responsible for making payments only when you make a default, but they are not taking out a loan. However, when you apply for a loan with a co-applicant, you are both taking out a loan. You both will be responsible for paying monthly instalments on time. Your lender will consider the repaying capacity of both parties. If any of you is suspected, your lender will refuse you a loan. Further, if you or your partner struggles to keep up with payments, the whole instalment will be made by your co-applicant, and yet there will be damaging effects on the credit reports of both parties.

The bottom line

A car loan is expensive. You should have a good repaying capacity and a credit rating. In case your credit report is not so perfect, you can arrange a guarantor to improve your chances of qualifying for lower interest rates. However, it is not always possible. Your lender will take account of your overall financial circumstances. Even if you arrange a larger deposit, your lender may not offer you a very affordable deal.

Financial experts always suggest you keep your credit rating in good condition. In case it is not, try to apply for a car loan with a co-applicant. Think of buying a secondhand car because it will reduce the total size of the loan. Do proper research while borrowing money. Ensure you apply for a direct lender bad credit loans in the UK that come with better deals.