Does having PCP car finance seriously damage chances of a good interest rate loan?

MoneySavingAtWork

I recently signed up to Credit Club here on this website to try and get a better understanding of my finances in preparation for a large purchase somewhere in the summer. Funnily enough this large purchase is a new car, one I’ve been budgeting for several years now and despite its price tag will be affordable for my personal circumstances. To my complete astonishment the credit club put my affordability ratings for loans and credit cards in the very weak section! Shocked and really rather worried by this I gathered my full credit report from a source besides Experian and everything looked correct with a high score. I should stress I’m in my late 20’s with a stable job and have had plenty of credit agreements over the last 10 years always with a perfect record. I have always placed a very high significance in the importance of keeping a healthy credit score and kept my monthly commitments as low as possible. On review I found two possible causes for these poor affordability ratings.

Credit Card
I always have a balance on a credit card (around £500) – It’s a cashback card which I used for food and fuel purchases throughout the month. There is a monthly fee and the cashback more than doubles this making it better to use this than pay from a debit card. The full payment is taken every month so I never pay any interest it’s purely a way of me making money back. A possible problem could be the credit limit is small relatively small (I have never asked for an increase) and my debt to available credit ratio often for that card often ends up in the 25-40% mark.

Possible solutions:
• Cease all spending on the credit card – this seems counter intuitive as I end up worse off my at least £5 per month through lost of cashback, but easy to do
• Ask for a higher credit limit on the card in an attempt to address the ratio discussed above. This has some risk as it may involve a credit check and they could say no given the current affordability rating suggested in the Credit Club. Having a credit limit of around 1 month’s wages sounds quite low to me?

Car Finance
I think is the real killer? My current car was purchased on a PCP with a large initial deposit and low monthly repayments, followed by an optional balloon payment should I wish to keep to car beyond the agreed term. On my credit file the whole balance of what remains (including balloon payment) is showing up as debt, up to date debt, but debt all the same which having had the agreement for nearly 2 years now totals somewhere in the region of half my annual income. I don’t believe this is representative of my financial situation because that should be secured against the car and that has some additional equity on beyond the remaining balance.

Possible solutions:
• Overpay as much as possible – this will only save me interest in the long run. I’ve checked and they won’t let me partially overpay the balloon payment, it’s either the full settlement payment or not at all. The problem is I don’t have the capital to pay the entire balloon payment without finance from another source.
• Sell the current car to clear the finance. I view this as an unnecessary sacrifice as affordability is not a problem in the slightest and my new car won’t be available until the summer. An opportunity will present itself in the near future to drive something less glamorous until the summer without any need for finance should this be the path I take so I could still get to work ok.

Why the need to address these issues?
In the first paragraph I mentioned the end goal was to have a new car, one that would be very special to me and been planning for several years. Unfortunately the particular model I’m after has finance deals which I would consider less than competitive. I knew this all along and planned a personal loan at a much lower interest rate to make this a reality. Currently interest rates from banks look (on first glance) highly competitive and going about this in that way would save me many hundreds of pounds over the next 3 years so seemed like a no brainer. Foolishly, I never considered it might be difficult to get the advertised rates from the banks as this has never been a problem in the past with very similar spending habits and income with the only exception being the finance on my current car. I haven’t actually applied for any loans yet, but soft searches an credit club ratings have revealed the headline interest rates will most likely be out of reach for now. It’s important I resolve this before the summer.

I’m curious if its common to have to have a hard time getting a personal loan at the advertised rate when they have PCP car finance?

I’m curious how accurate MSE credit club affordability ratings are in peoples experience and any insight as to how these are worked out?

I’m also looking for advice in how to proceed. I'm sure there are plenty of clever people here who may see something perhaps I’ve overlooked?

Many thanks for your time.

[Deleted User]

Your existing debt will be taken into account for any new application.

That's your main issue.

DCFC79

Dont worry about the score, you just need to make sure the history is all correct as this is what lenders will see and use to determine if they lend to you and at what rate.

MoneySavingAtWork

Thanks for your comment. Do you have any knowledge of what level of debt compared to annual income is considered an good level of risk for a bank?

[Deleted User]

It varies enormously by lender, as it is also about affordability.

5k debt on a 20k salary may be fine if you're living at home on the Isle of Man, but not if you're renting in London and have three kids.