Can I get car finance on benefits?

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

By John Evans Oct 21, 2022

Being on benefits shouldn't stop you from getting a car if you need one for work or taking the kids to school. Your reasons for needing a car are the same as anyone else’s, so don't be discouraged from applying.

It is worth being realistic about what you can afford to borrow if you're on benefits, though. If you have a low income and have a limited amount to spend each month, you'll want to scale your expectations by focusing on cheaper cars.

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

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. Click on the link below that best reflects your situation to find out more:

Aren't benefits a red light to car finance 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 they may have a credit scoring system (the system lenders use to work out how much you can afford to borrow) that penalises the slightest blemish on an applicant's financial history record.

On the other hand, there are specialist lenders who actively seek to lend to higher-risk customers with low credit scores. Remember, somebody on benefits need not necessarily have a low credit score; receiving benefits may follow a sustained period of strong finances and responsible borrowing, for example.

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' 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.

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Is car finance different for people on benefits?

In short, no. It still involves the lending of 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 which, subsequently, could see them missing a payment 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 itself against the likelihood of borrowers missing payments - and the higher risk they consider a person, the more interest they're likely to charge them.

Borrowers should be wary that some less respectable lenders do exploit this, though, by charging high interest rates to low-risk customers. To be confident whether what you're being quoted is a good deal or not, 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.

Car finance on benefits: what to watch out for

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:

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 targeting those on benefits may take advantage of people's situation by charging extortionate interest charges.

The Money Advice Service also 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 trustworthy companies may be 500% or even as much as 4,000%.

This could potentially add many thousands to the total amount that you have 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, inflated by huge interest charges. Remember, that 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

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 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.

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

You may want to avoid online finance brokers who charge an application fee. This is sometimes as high as £300 and 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 applications make it look as if you are desperate for credit and 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, and 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 - but 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, so if you’re receiving benefits related to these conditions, be wary of 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 rates on the back of any physical or mental conditions you may have, walk away and remember that a vast majority of companies won't do this.

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.

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: one final piece of advice

Some lenders will look to take advantage of your situation, so temper your enthusiasm for car finance and have your guard up. Put simply, if a loan 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, you can walk away if you don't think you can afford the amount you're being offered or the payments quoted.

*Representative PCP finance - Ford Fiesta:

48 monthly payments of £192
Deposit: £0
Mileage limit: 8,000 per year
Optional final payment to buy car: £2,923
Total amount payable to buy car: £11,926
Total cost of credit: £2,426
Amount borrowed: £9,500
APR: 9.9%

BuyaCar is a credit broker, not a lender. Our rates start from 6.9% APR. The rate you are offered will depend on your individual circumstances.