When you have a poor credit score, acquiring a car loan can be more expensive than if you have good credit. Lenders consider individuals with low credit scores to be high-risk borrowers, so they often charge higher interest rates to compensate for the perceived risk.
How to calculate the cost of bad credit finance
To calculate the total cost of bad credit car finance in the UK, consider the following factors:
- Principal amount: This is the initial amount you’re borrowing to purchase the car. It’s essential to know this number as it forms the base on which interest will be calculated.
- Interest rate: This is the annual percentage rate (APR) you’re charged for borrowing the money. Those with poor credit can expect higher interest rates than those with good credit. In the UK, the average interest rate for a car loan might vary, but bad credit could mean rates as high as 10-30% or even more.
- Loan term: This is the duration over which you’ll repay the loan, usually expressed in months or years. Bad credit finance options might sometimes offer longer terms to reduce monthly payments, but this can also mean more interest paid over the life of the loan.
- Additional fees and charges: Some lenders may charge additional fees for administration, early repayment, or late fees. These can add to the overall cost of your finances.
To calculate the total cost of your bad credit car finance, you can use this formula:
Total Cost = Principal Amount + ( Principal Amount * Interest Rate * Loan Term) + Additional Fees and Charges
Here’s an example
Let’s say you’re financing a car worth £10,000 with a bad credit loan. The lender offers you an interest rate of 20% per annum, and the loan term is 4 years. If there’s an additional £200 in fees, the total cost will be:
Total Cost = £10,000 + ( £10,000 * 0.20 * 4) + £200
Total Cost = £10,000 + £8,000 + £200 = £18,200
In this example, you’ll end up paying £18,200 over 4 years for a car that was priced at £10,000. That’s an additional £8,200, primarily because of the high-interest rate due to bad credit.
In conclusion, if you’re considering bad credit car finance in the UK, it’s crucial to be aware of the associated costs. While it might seem like a feasible option given your credit situation, the total cost could be significantly more than you initially anticipated. If possible, it might be beneficial to improve your credit score before seeking car finance or exploring alternative funding options to reduce the overall financial burden.