Credit score and car finance

Car finance lets you pay for a car in monthly instalments instead of paying the full price upfront. If you’ve recently moved to the UK, the process might feel new. Credit scores, checks, and finance rules are not the same in every country.

This guide explains how car finance works in the UK, what lenders usually look at, and how your credit score can be affected. It also covers what happens if you miss a payment or if your car is written off, and how this can affect other plans like getting a mortgage.

Learn the basics in our guide to how car finance works in the UK.

How does car finance work in the UK?

Car finance lets you borrow money to buy a car and repay it over time. You choose a car, agree a payment plan, and sign a finance agreement that sets out the terms.

There are three common types of car finance in the UK:

• Hire Purchase (HP): You pay a deposit, then make fixed monthly payments. When you make the final payment, the car is usually yours.
• Personal Contract Purchase (PCP): You pay monthly for a set period. At the end, you can return the car, trade it in, or make a larger final payment (called a balloon payment) to keep it.
• Personal loan: You borrow money from a bank or lender, buy the car yourself, and repay the loan separately over an agreed time.

Before saying yes, lenders usually want to see if the monthly payments fit your budget. They may look at your income, your regular spending, and your credit record.

Who is eligible for car finance in the UK?

Each lender has its own rules, but they usually expect you to:

• Be at least 18
• Have a UK bank account
• Provide proof of your identity and address
• Show regular income or employment

If you’ve recently moved to the UK, you may have a short address history and a limited credit file. This means the lender has less information about your financial background. Some lenders will still consider you, but:

• You may have fewer options
• The interest rate might be higher

The car itself also matters. Very old cars, heavily modified vehicles, or cars with very high mileage can be seen as higher risk, and some lenders avoid them.

Do you need a good credit score for car finance?

A credit score is a simple way of showing your past financial behaviour. In the UK, different credit reference agencies use different scoring systems. This means one lender might see your score as strong, while another sees it as average.

There is no single credit score needed to finance a car in the UK, but:

• A longer and stronger credit history usually helps
• Having a “thin” or limited file does not always mean a refusal
• Lenders focus heavily on whether the monthly payment is affordable

If you’re new to the UK, your credit file may be thin rather than bad. Paying bills on time, staying within agreed limits, and making regular payments can help you build your score over time.

Find practical tips, find out how to build your credit score as an immigrant in the UK.

Does car finance affect your credit score?

Yes. Car finance can affect your credit score in both positive and negative ways.

It may help your score if you:

• Make every payment on time
• Stay within the agreed terms of your agreement
• This shows you can manage credit responsibly.

It may harm your score if you:

• Miss payments
• Pay late
• Ignore letters from your lender

Missed or late payments can stay on your record for several years. Applying for lots of credit in a short time can also cause a small, short-term drop in your score because of repeated hard checks.

Some people worry that checking their own credit score will reduce it. This is not true. Looking at your own report is usually a ‘soft check’ and does not affect your score.

Does car insurance affect credit score?

Yes, a monthly car insurance contract can affect your credit score. In effect, a car insurance contract creates a credit agreement and requires a hard credit check.

If you miss payments, then it can reduce your credit score. On the other hand, paying on time every month can improve your credit.

Getting a car insurance quote does not impact your credit score as only a soft check is required.

Does car finance include insurance?

Most car finance agreements do not include car insurance. The finance company handles the loan. You are responsible for arranging car insurance before you drive the car.

When you plan your budget, remember to include:

• Monthly finance payments
• Car insurance costs
• Other running costs like fuel, tax, MOT, and maintenance

What if I cannot pay my car finance?

If you think you might struggle to pay, contact the finance company as early as possible. They may be able to:

• Change your payment date
• Offer smaller payments for a short time
• Agree a temporary payment plan

What they can offer depends on your agreement and your situation.

If payments stop and the lender cannot reach you, they may:

• Add fees
• Report missed payments on your credit file
• Start the process to recover the car

This can make it harder to get credit in the future. In some cases, once you have paid at least half of the total amount due under the agreement, you may be able to return the car and end the contract. This is called voluntary termination. It has specific rules, so always read your agreement or ask the lender to explain.

Does car finance affect a mortgage application in the UK?

Yes. When you apply for a mortgage, lenders look at all your regular financial commitments. Monthly car finance payments count as debt, so they reduce the spare income available for your mortgage.

This does not mean you cannot get a mortgage if you have car finance. It simply means:

• The amount you can borrow may be lower
• The lender will check that you can afford both payments

Paying your car finance on time can still help show that you manage credit well.

How Marshmallow can help

Marshmallow helps people who are new to the UK and want simple products and fair prices. We can help with both car finance and insurance, taking international driving history into account and going beyond your UK credit score to give you a fair rate.

See if our car finance could work for you, or get a quote for car insurance today.