Can I get car finance if I'm self-employed?
If you're self-employed, you may not think you can get car finance. That's not necessarily true, though. Keep reading for all the details
Self-employment is now much more common - with many people actively choosing to take the plunge - and while there are benefits to becoming your own boss, certain aspects of life can become more difficult, too. One of these is taking out car finance. But there are ways to secure finance when self-employed.
As a self-employed worker, you might wonder how you'll be viewed by lenders who may be cautious about offering credit to someone with less predictable income. Not having a set wage every month or the payslips to prove your earnings may be a concern. However, being self-employed itself shouldn't be a barrier to getting finance.
In fact, thanks to the growth in self-employment and the demand for credit, lenders have become much smarter at serving the sector and lending to self-employed people. Naturally, they still require you to satisfy certain criteria, but it’s now a more balanced relationship between lender and borrower.
That said, there are still a number of things that self-employed workers can do to improve their prospects of being accepted for finance.
No matter what your current position, it may be possible to secure yourself a car finance deal if you don't have the cash to spare.
Self-employed car finance: spring clean your credit
Before you do anything, it's worth checking the accuracy of the information on your credit report with the three major credit reference agencies that help determine how easily people can access credit.
This contains key personal details such as your name, address, whether you’re on the electoral roll and any county court judgements - also known as CCJs, which could be issued against you if fail to repay money you owe.
Your credit report will also record financial information relating to existing loans you may have, current account overdrafts, any loan defaults and even the number of loan applications you’ve made in recent months, although not the results of those applications.
The main credit reference agencies are Experian, Equifax and Trans Union. Each operates a pubic checking service. Alternatively, you can use the likes of ClearScore, Credit Karma, Moneysupermarket’s Credit Monitor or Money Saving Expert’s Credit Club to access these.
You’re checking your file for errors, inconsistencies, misunderstandings and any other glitches that could downgrade your credit status in the eyes of lenders. If you see anything inaccurate, notify the reference agency and if it agrees with your claim, it must amend your file.
Car finance for self-employed: get your finances straight
When applying for finance as a self-employed person, you want to present the best possible case to your lender. So, if you can, settle any old loans, end non-essential subscriptions such as TV and magazines, and terminate financial partnerships such as a joint bank account, where the other party has a poor credit history.
That's because being linked to someone with a low credit score can reduce your own rating, potentially preventing you from being approved for finance. Similarly, lots of unnecessary expenditure could make car finance look less affordable to a lender, so if you can reduce your regular spending ahead of applying for finance, this could help, too.
Get on the electoral roll
If you aren't already, get yourself onto the electoral roll, since this official register of who is eligible to vote helps to establish your identity and settled address.
Both pieces of information are crucial to lenders when considering your application. Having been at one address for a substantial amount of time is a positive factor compared with having moved around regularly, which could raise further questions.
Provide your latest trading accounts
These provide proof of business solvency and your ability to repay a loan, after expenses have been taken into account. Previously, at least three years’ worth of accounts were required to be approved for finance, but in recent years lenders have relaxed this demand to the extent that two or even just one year’s worth may suffice.
For finance purposes, tax returns should also be acceptable. Where evidence of trading performance is required, the business’s net profit after tax will be considered, a figure that should be at least double the amount you're looking to borrow. However, other lenders will cap what they lend you at up to 25% of your net monthly income.
Show your bank statements
Where a business hasn’t been trading for long enough to generate meaningful accounts, bank statements may also be considered as proof of income and outgoings.
These also demonstrate your financial history and provided you haven't consistently spent more than you earn, could help you to secure finance. Again, expect most lenders to set a borrowing limit at around 25% of your net monthly income.
Self-employed car finance: be realistic and truthful
A lender is looking to see that you are truthful and have a clear understanding of your financial position and the ability to pay back anything you borrow.
So do not overstate your income and do demonstrate a detailed knowledge of your outgoings. Above all, do not apply for a loan that is clearly beyond your means since it shows financial naivety and you can expect to be declined, which could leave a negative mark on your credit history, making it harder to get credit in future.
Consider what the car is for
Many lenders will not consider a loan where the vehicle is likely to be used primarily for business purposes. This is because the vehicle is likely to experience greater wear and tear than normal, especially as cars used for business are likely to accrue a higher-than-average mileage.
Together these factors mean that if you fall behind on payments and the lender is forced to seize the car, it could be worth a lot less than the amount still owed.
An example of such a business is a taxi service or driving school. For these businesses, Hire Purchase could be a solution, as this is set up so that you own the car at the end of the contract.
Similarly, commercial vehicles - such as vans - that are subject to higher levels of wear and tear are normally only available on Hire Purchase or Lease Purchase, where the contract is devised so that you become the owner at the end of the contract.
Self-employed car finance: large deposit
If you can afford it, putting down a large deposit not only means you have a smaller loan to pay off but it also reduces the risk you pose to the lender, making them more likely to lend you the money you're after.
Another benefit of paying more upfront is that you'll have lower monthly payments and will pay less interest overall, as you're borrowing less.
Propose a guarantor or submit a joint application
If you're still having issues getting approved for finance as you're self-employed, another option to consider is guarantor finance. This is often targeted at young drivers, but could help if you don't have much of a credit history and have someone who is willing to back you up, if you have trouble paying.
This third party takes on the responsibility of paying on your behalf should you be unable to repay the loan. They will need to have a good credit rating and be able to demonstrate they can make the payments if you can't. Alternatively, you could take out a joint application, again with someone who has a good credit score and will make the payments with you.
Get your application right, first time
When you apply for finance, a credit check will be made on you. The trouble is, every application you make generates a fresh check that gives the impression you are making multiple loan applications.
As a result, your credit rating can suffer - as numerous applications in a short period of time can make it seem as if you're in a dire financial situation - making it less likely you will be accepted for a loan.
Don't risk it and instead get your finances straight, choose your lender carefully and then apply, confident that you will be accepted first time.