Can I get car finance on benefits?
Receiving benefits shouldn't be a barrier to successfully applying for car finance but important considerations to factor in. Here's our guide to everything you need to know.
Your reasons for needing a car are the same as anyone else’s, so don't be discouraged from applying for finance if you receive benefits.
Naturally, you will need to be realistic about what you can afford to borrow if you receive benefits, though. If you have a low income and have a limited amount to spend each month, you'll need to temper your expectations by focusing on less expensive cars.
Here we explain how you can apply for car finance while receiving benefits and flag up warnings about lenders that may try to exploit your situation.
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. Keep reading for more information and click for our guide to Personal Contract Purchase (PCP) finance, or to understand how Hire Purchase (HP) works, to get to grips with the main car finance options.
Aren't benefits a red flag for car finance lenders?
This depends entirely on the lender and the type of customer they’re hoping to attract. Some lenders, especially high street banks, generally prefer to lend to those with higher incomes and use a credit scoring system to work out how much you can afford to borrow. These usually penalise people with the slightest blemish on their financial history record.
On the other hand, there are specialist lenders who actively seek to lend to higher-risk customers with low credit scores.
It's important to remember that receiving benefits doesn't necessarily mean a person has a low credit score, especially if they have 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 good 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' incomes 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 your chance to present a realistic and responsible picture of yourself and your finances that may help strengthen your case and address any negatives in a credit reference agency’s report.
When you're applying for finance, 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 car finance different for people receiving benefits?
In most instances, no, it shouldn't be any different. It still involves borrowing of a sum of money that must be repaid, with added interest , over an agreed period of time.
What may be different for people receiving benefits is that amount loaned and the interest they pay back could be less favourable due to them being perceived as a higher risk.
This is because they may have a limited income and other pressures on their finances that restrict their borrowing capacity in the first place which could see them missing a payment should they overstretch themselves.
Lenders have to protect themselves against the potential of borrowers missing repayments — the higher risk they consider a person, the more interest they're likely to charge them.
Borrowers must be wary in case less respectable lenders attempt to exploit this by charging high interest rates to customers who are actually low risk. To be confident about whether or not what you're being quoted is a good deal, it's best to shop around for multiple quotes. Do this and you'll see what type of interest rates are available to you. If one company is looking to charge much more for the same finance product than another, it's likely that they're overcharging you, so take your custom elsewhere.
Car finance on benefits: What to watch out for
Those receiving benefits or with low credit scores need to tread warily when applying for car finance as there are a limited number of options which increases the risk of being taken advantage of. Be alert to the following warning signs:
Very high interest rates
The Money Advice Service warns against borrowing from lenders whose names come up prominently when searching for ‘loans for people on benefits’ or ‘loans for disabled people.' Some companies specifically targeting those receiving benefits may take advantage of their situation by charging extortionate interest rates.
It also suggests that while you may be expecting an interest rate of around 10-20%, the APR — or the actual rate that you pay — with less trustworthy companies may be as much as 20 times as high.
This would add several thousands to the total amount to pay back and make it far more likely that you'll be unable to meet the monthly payments, as they would end up being artificially high. Remember, you don't have to take finance from any of these companies, so if you think they're looking to rip you off, walk away.
Low or 0% interest rates
Conversely, you'll also need to be cautious of loans where you appear to be paying a very low interest rate or none at all on a used car. If you're getting the finance through a car dealer offering such a scheme, the high cost of the loan will have already been included in price of the car itself, making it far higher than it should be — this is unlikely to be 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 with the lowest monthly payments.
Ensuring the car's cash price is competitive also ensures that a high premium isn't sneakily being charged, despite a low or 0% APR figure, so check what other dealers are selling similar models for.
Lenders who guarantee to lend you money
Lenders cannot guarantee to lend you money, since this would mean ignoring your credit score and financial position. The 2010 Consumer Credit Act states that making false or misleading claims in relation to consumer finance is an offence.
Therefore, if a finance company turns a blind eye to this, walk away since it may also be reckless in other ways or even fail to follow other lending laws. There are more than enough reputable finance firms, that you do not have to deal with companies like this.
Application fees
Charging a fee simply for applying for finance is grubby, but some brokers continue to do operate this way.
We would advise avoiding those which do — although companies 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 formal loan applications because these reflect badly on your credit score. Regular and frequent applications make it look as if you are desperate for credit and potentially borrowing beyond your means to a credit reference agency.
Read up on the difference between a soft search and a hard search to understand the difference between getting a quote and formally applying for finance, as well as the impact making a number of formal applications can have on your credit rating.
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. Just remember not to make numerous formal finance applications. Fail to do this and you could end up unable to get the best deal.
Car finance on disability benefits
Be aware of lenders that discriminate on the basis of your physical or mental condition — this is illegal.
If you’re receiving benefits related to these conditions, our advice is to walk away from finance companies presenting these as justifications for refusing to lend to you or increasing the cost of your loan. The vast majority of companies don't operate this way.
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 straightforward Hire Purchase (HP) finance 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 deals 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 remotely.
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 keyed 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: One final piece of advice
Some lenders will look to take advantage of your situation, so curb your enthusiasm and have your guard up. Put simply, if a deal seems too good to be true, it probably is.
It's worth being 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 to 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, it works both ways — you can walk away if you don't think you can afford the amount you're being offered or the payments quoted.