How bad credit affects your loan application

A bad credit score makes you a riskier prospect in your lender's eyes, especially if you don’t have a good income history and are looking for an unsecured car loan.

If you have a history of late loan repayments and unpaid debt or defaults, this will likely be reflected in your credit history, and your score will suffer. A ‘bad’ credit score is highlighted below.

Credit score range





800 to 1,000

853 to 1,200

800 to 1,000

Very good

700 to 799

735 to 852

700 to 799


500 to 699

661 to 734

625 to 699


300 to 499

460 to 660

550 to 624


0 to 299

0 to 459

0 to 549

Lenders ideally want to avoid the repossession process, which can be time consuming and sometimes means a loss if the borrower has slipped into negative equity i.e. they owe more on the car loan than the vehicle is worth. They also are obligated by the regulator to promote responsible lending.

This means there are a few extra things people with ordinary credit scores should be aware of when looking at car loans.

Higher interest rates

Every time a loan is written, there’s a risk/reward calculation going on with the lender. The lender is weighing up the probability of a default against their potential returns. This means when they write a loan for a customer they feel has a higher chance of defaulting, the interest rate charged will often increase, to offset the risk.

Extra expenses

For the same reason, higher fees (account keeping, processing etc.) might apply to bad credit car loans. The lender might also require the vehicle to have comprehensive insurance until the loan is fully repaid, to protect their collateral.

Harder to get accepted

While bad credit doesn’t mean you will be turned away by everyone, it is a mark against you. All lenders are risk assessors, and a sub-par credit score is a common reason loan applications are rejected. Some lenders might decide that while they are willing to grant a loan, your poor credit history means they only offer a smaller amount than you asked for.

Improving your chances of approval

There are several ways you can increase both the maximum amount your lender is willing to give you and your chances of being accepted in the first place.

1. Demonstrate your ability to pay

At the end of the day, your lender's decision will rest on their confidence in your ability to make all your repayments, in full and on time. Poor credit is a mark against you, because it shows you have a history of failing to meet your debt obligations.

However, this can be offset if you can demonstrate you have a strong, stable income that could easily incorporate the repayments. If you’ve been collecting a steady paycheque in permanent, full-time employment for at least a few months, this could heighten your chances of approval.

2. Improve your credit score

It might seem fatuous to point out, but improving your credit score will nearly always improve your chances of being approved for a loan. There’s a few steps you can take to start rebuilding your credit reputation.

  • Pay all your bills on time

  • Don’t apply for too many credit cards

  • Check your credit report for mistakes

Even things like paying your electricity and phone bills on time can go a long way in improving your credit history.

The credit reporting agencies will let you access your in-depth report for free once per year. It’s worth going over it to see if there’s any mistakes. If you have a much worse credit score than you thought, it could through fraudulent financial activity such as a scammer, or a partner applying for loans in your name.

3. Play the waiting game

If your credit is severely damaged, it might be wise to wait until you’ve improved your credit score before applying for a car loan. Negative credit activity will appear on your report for up to seven years. Use this time to address any issues on your credit report and build better financial habits. Even if you think you might be able to get a loan straight away, waiting might mean you get approved for a lower rate, so it’s worth considering.

4. Save a deposit

One of the major ways lenders assess risk is Loan to Value Ratio (LVR). This measures how big the loan is relative to the value of the car. Higher LVR loans are generally viewed as riskier, because there is a heightened chance of negative equity, where there is a larger outstanding amount owed than the car is worth. Lenders want to avoid this because when the borrower defaults, the lender can’t recoup the entire investment from repossessing and reselling the vehicle, so they make a loss.

Many lenders allow car loans without a deposit, but if you are able to get together an upfront payment, this reduces the LVR of your loan. Say you’re buying a car for $50,000. If you don’t have a deposit, you will need to borrow the full amount, so your LVR is 100%. If you instead pay a $5,000 deposit, your LVR becomes 90% (a $45,000 loan is 90% of the total value). This can often mean lower interest rates, and increase your chances of getting approved.

6. Use a guarantor

If you're having trouble getting approval for a car loan on your own, adding a guarantor to your application is a good way to improve it. A guarantor is someone with strong credit who agrees to take responsibility for the loan if you default, typically a parent or another close family member. This can offset your sub par credit, as the lender will be reassured that the repayments will keep coming in if you default. Be aware though that the full burden of the loan will fall on the guarantor if you default, and has the potential to damage their credit score.

Car loan comparison 101

Research lenders

Not all lenders specialise in bad credit car loans. If you do your research, you might be able identify those willing to work with borrowers with less than perfect credit. Make sure the lending institution remains reputable, with positive reviews and a track record of helping borrowers in similar situations.

Compare rates, terms and fees

Interest rates and loan terms can vary significantly among lenders. Taking the time to compare offers from multiple lenders can help you secure the most favorable terms. Even a small difference in interest rates can have a big impact on your monthly payments and the total cost of the loan.

You should also make sure you’re taking fees into account when comparing loan products. Look out for any hidden charges that could inflate the cost of the loan. Fees commonly apply for loan establishment and account keeping, as well as penalties for breaking early.


Don't be afraid to try to negotiate more favourable loan terms. If you can demonstrate your commitment to repayments, the lender may be willing to lower interest rates or waive certain fees. Be prepared to provide documentation or explain any positive changes in your financial situation.

Get personalised advice

It doesn’t hurt to consult a finance professional or a credit counsellor to get some expert input on how best to navigate getting a car with your bad credit score.

If you're struggling with debts:

  • Consult a free financial counsellor

  • Call the National Debt Helpline on 1800 007 007 

  • Call Lifeline's 24-hour crisis support service on 13 11 14

  • Contact your bank or lender's financial hardship team