Car finance on benefits: can I get it?

Receiving benefits shouldn't stop you getting car finance; but there are some important facts to think about. Keep reading to find out more

John Evans
Nov 29, 2019

Being on benefits shouldn't be a barrier to mobility. Your reasons for needing a car are the same as anyone else’s and, depending on your circumstances potentially greater, so don't be discouraged from applying.

It is worth being realistic about what you can afford to borrow, however. That means that if you have a low income and can't spare much every month, you'll want to scale your expectations to suit.

We explain how you can get finance while on benefits and flag up warnings about those lenders who may try to exploit your situation. Keep reading for more information and click for our guide to PCP finance and to understand how Hire Purchase works, to get to grips with the main finance options.

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Isn't receiving benefits a red light to lenders?

It depends on the lender and the type of customer they’re trying to attract. Some lenders, especially high street banks, prefer to lend to those with higher incomes or may have a credit scoring system (the system lenders use to work out how much you can borrow) that penalises the slightest blemish on applicants' financial history.

On the other hand, there are specialist lenders who actively seek to lend to higher risk customers with low credit scores. Of course, somebody on benefits need not necessarily have a low credit score; receiving benefits may follow a sustained period of strong finances and responsible borrowing. A record like this will stand borrowers in good stead when applying for a loan, which is why you may also want to approach traditional high street lenders if you have a reasonable payment record.

Additionally, the credit reference agencies - which provide much of the information that lenders rely on when deciding whether or not to lend money - don't have the complete picture of a borrower’s finances. For example, they don't hold information on applicants' income and outgoings or details of their employment or other work.

Instead, the lender must get this information directly from the borrower when they do an affordability check during the loan application. This is the borrower’s chance to present a realistic and responsible picture of themselves and their finances that may help strengthen their case and address any negatives in a credit reference agency’s report. Make sure you present a truthful, accurate picture of your finances, however, as lenders may refuse to give you finance if they think you're lying to them.

Is a loan to someone on benefits different from one to someone who is not?

In short, no. It still involves a sum of money that must be repaid, with interest added, over an agreed period. However, the sum that somebody on benefits can borrow and the interest they pay may be different. This is because they may have a limited income and other pressures on their finances that restrict their borrowing capacity in the first place and which, subsequently could mean them missing an instalment should they overstretch themselves.

Repayments are how lenders get their money back, so people who have a history of missing these are likely to be seen as a high risk to lenders. The lender has to protect themselves against the likelihood of borrowers missing payments - and the higher risk they see a person, the more interest they're likely to charge them. Borrowers should be wary that some lenders do exploit this, though, by charging high interest rates to low-risk customers.

What should I be wary of when applying for a car loan on benefits?

There are dozens of finance options for people with good credit scores plus numerous reputable bad credit car finance deals, so watch out for less honourable lenders taking advantage of your circumstances, by keeping an eye open for the following:

Lenders who discriminate on the basis of your physical or mental condition

This is illegal, so if you’re receiving benefits related to these conditions, watch out for finance companies presenting these as excuses for refusing to lend to you or increasing the cost of your loan.

So, if a company hikes up its prices on the back of any physical or mental conditions, walk away and remember that a vast majority won't do this.

High interest rates

The Money Advice Service warns people against borrowing from lenders whose names come up prominently when you search online for ‘loans for people on benefits’ or ‘loans for disabled people’. Some companies targetting those on benefits may take advantage of people's situation by charging extortionate interest charges.

The Money Advice Service states that while you may be expecting an interest rate of around 10-20%, the APR - or the actual rate that you pay - with some of these less honourable companies may be 500% or even 4,000%.

This could potentially add thousands to the total amount you pay and make it far more likely that you'll be unable to meet the monthly payments - as they would end up being artificial high, inflated by huge interest charges.

Low or 0% interest rates

On the other hand, you'll also want to be wary of loans where you appear to be paying a very low interest rate or even no interest at all on a used car since, if you're getting the finance through a car dealer, the high cost of the loan will have been bundled into the cost of the car itself.

This means the cash price of the car is likely to be higher than it should be. This makes it very hard to work out whether you're getting a good deal. If in doubt, it's always a good idea to get like-for-like finance quotes (the same type of finance, deposit amount, contract length and mileage allowance) for several cars to see which offers you the best value.

Lenders who ‘guarantee’ to lend you money

Lenders cannot do this since this would mean ignoring your credit score. The 2010 Consumer Credit Act states that making false or misleading claims in relation to consumer finance is an offence.

If a finance company turns a blind eye to this, walk away since they may also be reckless in other ways or even fail to follow other lending laws.

Application fees

Avoid online finance brokers who charge an application fee. This is sometimes as high as £300 and although the company may tell you it’s refundable, in reality they may make it difficult for you to get your money back.

Making too many loan applications

Don't make too many loan applications because these reflect badly on your credit score, since regular applications make it look as if you are desperate for credit and borrowing beyond your means to a credit reference agency.

It's always a good idea to get like-for-like finance quotes for several different cars before making your mind up - to make sure you're getting a good deal - but remember not to make numerous finance applications. Fail to do this and you could end up unable to get the best deal.

Pay-as-you-go car finance on benefits

Pay-as-you-go car finance is a form of loan available not only to people on benefits but to anyone who is struggling to get credit. It’s based on a straightforward Hire Purchase (HP) loan secured on the car, which means the vehicle remains the property of the lender until the loan is fully paid off.

Where it differs from most Hire Purchase loans is in the discreet fitment of a small black box inside the car. This connects to the car’s internal computer and communicates with the finance company via a GPS link. Fail to make payments and the finance company can then immobilise the car.

Around three days before the monthly payment is due, a light on the box flashes to alert the driver. Once the payment has been made, an activation code is sent to the driver’s phone which, when entered into the box, turns off the light and allows you to continue driving the car.

Failure to enter the code within 30 days will cause the current activation code to expire and the car to be deactivated, meaning you can no longer drive it.

Car finance on benefits: a final piece of advice

Some lenders will look to take advantage of your situation, so temper your enthusiasm for that loan and have your guard up. Put simply, if a loan seems too good to be true, it probably is. It's worth beng realistic about what you can afford to borrow and setting your sights on something that falls within that budget.

Remember how much you're happy borrowing and don't let anyone persuade you to commit to more than you think you can pay back or monthly payments that you don't think you can afford. Just as the finance company won't approve you if they don't think you can afford a loan, you can walk away if you don't think you can afford the amount you're being offered.

        
                      

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