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Car finance ›
Can you get car finance with an overdraft?
Updated: Monday, 18 September 2023
Overdrafts can be convenient, but they come with risks. It’s important to manage an overdraft carefully to make sure you stay within any agreed limit, and also that you’re not paying high interest fees each month.
Depending on how you use it, your overdraft could also affect your ability to secure car finance.
Below is some useful information on overdrafts and how they may affect your finance application.
What are the different types of overdrafts?
Before we take a look at how an overdraft can affect your credit score and your ability to get car finance, let’s examine the different types of overdrafts.
There are two types of overdrafts, these are arranged and unarranged.
- An arranged overdraft is an amount your bank has agreed you can spend, when you don’t have those funds in your account. For example, your bank agrees for you to have a £150 overdraft limit. This effectively means your bank is lending you £150. If you use all of the arranged overdraft amount, you’ll have to pay that back before your balance will go back into credit and also before you’ll be able to use the overdraft again.
- An unarranged overdraft usually happens when you spend more money than you have available in your account, including any arranged overdraft, without agreeing that first with your bank.
Will an overdraft affect my credit score?
Having an overdraft may impact your credit file which could affect your chances of getting car finance.
An arranged overdraft is not likely to affect your credit rating significantly. Your credit score shouldn’t be heavily impacted if you stay within your overdraft limit. If you regularly exceed your overdraft limit, this can damage your credit rating.
Car finance companies can see how much of your overdraft you use and your overdraft limit. If they see that you’re frequently going over the limit, you might find it a bit more challenging to find a lender who will approve your vehicle finance application.
On the other hand, dipping into your overdraft every so often is less likely to impact your credit score significantly. If you don’t go beyond your limit and your outstanding balance clears each month, then you’re more likely to be seen as a reliable borrower.
There are several things you can do to improve your credit score if you have an overdraft, such as:
- Regularly paying off your overdraft
- Staying within your limit and not using an unarranged overdraft
- Consider switching to a bank account that charges lower fees for an overdraft, as this can help you to manage the debt more effectively.
If you want to know what your credit score looks like, visit Experian or ClearScore, where you can view your credit score for free.
But if you just want to understand credit scores a little more, discover our other guides:
Will an overdraft appear on my credit report?
When you apply for car finance, the provider will do a credit check to see if you are eligible for car finance. It is also to make sure the finance offer is affordable for you.
This is the case whether you’re applying for Hire Purchase (HP), Personal Contract Purchase (PCP), Conditional Sale (CS), Personal Contract Hire (PCH), or a personal loan.
Lenders have their preferred credit reference agencies they use to get this information. So, it’s important to know what they’ll see when they receive your report.
If you’re overdrawn at the time of this report, then your overdraft will show up as debt. If not, it would show as a zero balance.
Credit reference agencies tend to receive reports from banks once a month. So, if you’re only using your overdraft occasionally and then paying it off each month, it may not appear on these reports.
Why does an unarranged overdraft affect my credit score?
Unarranged overdrafts can negatively impact your credit score, as lenders may see this as poor financial management.
Relying on an unarranged overdraft might make it trickier to secure that car finance agreement you’ve been hoping to take out.
Will increasing my overdraft limit affect my credit score?
A change in your personal circumstances or the loss of a job may cause you to increase your overdraft. This shouldn’t affect your credit score. Yet, it may still have an indirect impact.
When you ask your bank to increase your overdraft, they will usually assess your credit history first. This means that they will need to run some credit checks. Many banks use a soft credit check for this, as it won’t show up on your credit report.
However, some banks will use a hard credit check. This won’t necessarily hurt your credit score, but it will appear on your credit report.
If you’d like to know more about the differences in credit checks, learn more in our guide about soft search vs hard search credit checks.
How does an overdraft affect my car finance application?
If you plan ahead and let your bank know that you need an overdraft, it’s less likely to affect your credit rating negatively. It also shouldn’t prevent you from being able to secure car finance. Still, if you’re not using your overdraft responsibly, the lender might view you as higher risk.
When you apply for car finance, the lender may ask for proof of income (such as 2 consecutive months of payslips, bank statements, or your tax return), so they can see how you’re using your overdraft if you have one.
If they see that you’re regularly over your limit and use an unarranged overdraft or rarely pay it off, your application may be rejected. If you’ve been refused, check out our guide for people that have been refused car finance. It will explain the common reasons you might have been refused and what this means for you.
It is worth noting that each car finance provider has different eligibility rules, and some lenders are stricter than others.
Overdrafts can be convenient, but they come with risks. It’s important to manage an overdraft carefully to make sure you stay within any agreed limit, and also that you’re not paying high interest fees each month.
Depending on how you use it, your overdraft could also affect your ability to secure car finance.
Below is some useful information on overdrafts and how they may affect your finance application.
What are the different types of overdrafts?
Before we take a look at how an overdraft can affect your credit score and your ability to get car finance, let’s examine the different types of overdrafts.
There are two types of overdrafts, these are arranged and unarranged.
- An arranged overdraft is an amount your bank has agreed you can spend, when you don’t have those funds in your account. For example, your bank agrees for you to have a £150 overdraft limit. This effectively means your bank is lending you £150. If you use all of the arranged overdraft amount, you’ll have to pay that back before your balance will go back into credit and also before you’ll be able to use the overdraft again.
- An unarranged overdraft usually happens when you spend more money than you have available in your account, including any arranged overdraft, without agreeing that first with your bank.
Will an overdraft affect my credit score?
Having an overdraft may impact your credit file which could affect your chances of getting car finance.
An arranged overdraft is not likely to affect your credit rating significantly. Your credit score shouldn’t be heavily impacted if you stay within your overdraft limit. If you regularly exceed your overdraft limit, this can damage your credit rating.
Car finance companies can see how much of your overdraft you use and your overdraft limit. If they see that you’re frequently going over the limit, you might find it a bit more challenging to find a lender who will approve your vehicle finance application.
On the other hand, dipping into your overdraft every so often is less likely to impact your credit score significantly. If you don’t go beyond your limit and your outstanding balance clears each month, then you’re more likely to be seen as a reliable borrower.
There are several things you can do to improve your credit score if you have an overdraft, such as:
- Regularly paying off your overdraft
- Staying within your limit and not using an unarranged overdraft
- Consider switching to a bank account that charges lower fees for an overdraft, as this can help you to manage the debt more effectively.
If you want to know what your credit score looks like, visit Experian or ClearScore, where you can view your credit score for free.
But if you just want to understand credit scores a little more, discover our other guides:
Will an overdraft appear on my credit report?
When you apply for car finance, the provider will do a credit check to see if you are eligible for car finance. It is also to make sure the finance offer is affordable for you.
This is the case whether you’re applying for Hire Purchase (HP), Personal Contract Purchase (PCP), Conditional Sale (CS), Personal Contract Hire (PCH), or a personal loan.
Lenders have their preferred credit reference agencies they use to get this information. So, it’s important to know what they’ll see when they receive your report.
If you’re overdrawn at the time of this report, then your overdraft will show up as debt. If not, it would show as a zero balance.
Credit reference agencies tend to receive reports from banks once a month. So, if you’re only using your overdraft occasionally and then paying it off each month, it may not appear on these reports.
Why does an unarranged overdraft affect my credit score?
Unarranged overdrafts can negatively impact your credit score, as lenders may see this as poor financial management.
Relying on an unarranged overdraft might make it trickier to secure that car finance agreement you’ve been hoping to take out.
Will increasing my overdraft limit affect my credit score?
A change in your personal circumstances or the loss of a job may cause you to increase your overdraft. This shouldn’t affect your credit score. Yet, it may still have an indirect impact.
When you ask your bank to increase your overdraft, they will usually assess your credit history first. This means that they will need to run some credit checks. Many banks use a soft credit check for this, as it won’t show up on your credit report.
However, some banks will use a hard credit check. This won’t necessarily hurt your credit score, but it will appear on your credit report.
If you’d like to know more about the differences in credit checks, learn more in our guide about soft search vs hard search credit checks.
How does an overdraft affect my car finance application?
If you plan ahead and let your bank know that you need an overdraft, it’s less likely to affect your credit rating negatively. It also shouldn’t prevent you from being able to secure car finance. Still, if you’re not using your overdraft responsibly, the lender might view you as higher risk.
When you apply for car finance, the lender may ask for proof of income (such as 2 consecutive months of payslips, bank statements, or your tax return), so they can see how you’re using your overdraft if you have one.
If they see that you’re regularly over your limit and use an unarranged overdraft or rarely pay it off, your application may be rejected. If you’ve been refused, check out our guide for people that have been refused car finance. It will explain the common reasons you might have been refused and what this means for you.
It is worth noting that each car finance provider has different eligibility rules, and some lenders are stricter than others.
For a better road ahead
Moneybarn is a member of the Finance and Leasing Association, the official trade organisation of the motor finance industry. The FLA promotes best practice in the motor finance industry for lending and leasing to consumers and businesses.
Moneybarn is the trading style of Moneybarn No. 1 Limited, a company registered in England and Wales with company number 04496573, and Moneybarn Limited, a company registered in England and Wales with company number 02766324. The registered address for these companies is: Athena House, Bedford Road, Petersfield, Hampshire, GU32 3LJ.
Moneybarn’s VAT registration number is 180 5559 52.
Moneybarn Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702781)
Moneybarn No. 1 Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702780)
