Self-Employed Car Finance

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Car finance for the self-employed

Being self-employed can be a good feeling – you can make your own hours, and you’ve got control with no annoying boss.

However, it can make life a little bit more complicated! When you work for a salary, you’ll often have things like tax and payroll done for you. But, when you’re self-employed, you have to sort all of that yourself.

How easy is it to get car finance for self-employed drivers?

Well, you’re not alone. There are nearly 5 million people in self-employment in the UK, and most need a car!

This guide will cover everything you need to know about getting self-employed finance.

Can I get car finance when self-employed?

It wasn’t always easy finding car finance when self-employed. Previously, you had to provide quite a bit of information about your income and how long you’ve been in self-employment. That can be hard when working for yourself, as it can be difficult to predict your income month to month: it can often vary significantly.

However, you’ll be happy to know that things have changed for the better. With so many finance providers now available, you’re bound to find more than a few happy to give you car finance – assuming you can afford it.

How does a credit provider view self-employed workers?

Many car finance companies are nervous about lending to people in self-employment because they’re a more significant risk. You’re usually guaranteed a specific income each month if you have a full-time employment contract. That means it’s straightforward for a lender to predict your overall income and assess whether you can afford to finance a car.

Being self-employed and not having a set wage every month can be difficult for the credit provider to see if you make enough. While you might make £4000 one month, the next you might make only £400 – it’s not always easy to tell.

Unfortunately for young drivers, getting car finance offers can be challenging if you’re under 21. A car loan for a young driver can be somewhat tricky anyway: add on the fact you’re self-employed, and it can be a tough task indeed.

While credit providers remain cautious about providing self-employed car finance, it’s nothing like it used to be. That’s purely due to the number of people in self-employment! There’s been a massive growth in people working for themselves, so lenders have had to become more intelligent to reach a wider clientele.

Why is it more challenging to get a car finance offer when self-employed?

Simply put, you need proof of income. When you’ve got a full-time employment contract, you can usually provide evidence of your monthly payment pretty quickly. If you make enough and have been there for more than a few months, you’re almost guaranteed to get accepted for a car finance credit agreement (assuming you have a decent credit score).

Proving “proof of income” is more complicated when working for yourself. The credit provider will want to have as much financial information about you as possible. They might ask for three months of bank statements to try and assess if your income is stable or turbulent.

One big improvement is the introduction of open banking, allowing the finance company to access your banking information and quickly assess your affordability—also a great way to show proof of income.

When a lender reviews your car finance application, they’re looking to see if you can stick to a repayment schedule. If your income is sporadic, or you can make the payments some months but not others, it will be hard to get accepted for self-employed car finance. While this is frustrating, it is ultimately in the lender and borrower’s best interest, as neither wants to be in financial difficulty!

Self-employed car finance with a bad credit score

The double-whammy – as if it wasn’t hard enough to get self-employed car finance!

In all seriousness, though, you’re not entirely out of luck. If you’ve had bad credit issues in the past, you’ll find that lenders are more cautious.

However, some credit providers are happy to offer vehicle finance to self-employed people with a bad credit score. Even if you’ve had CCJ’s, defaults, and IVAs, there’s still likely to be a lender who can help you find a car.

The catch is that having a bad credit score means the interest rates will be quite a bit higher, meaning you’ll ultimately pay more for the car in the long run. But if you need a reliable vehicle to get on with your life, it’s an option.

What types of car finance loans are available to self-employed drivers?

All of the standard car finance offers are available, even if you’re self-employed, including PCP (Personal Contract Purchase) and HP (Hire Purchase).

A PCP involves paying a monthly amount for the car and having an option to buy at the end of the contract term (called a balloon payment). You can either hand the vehicle back, pay the final payment to own it or take out another PCP.

A Hire Purchase is simpler: basically, you split the cost of the car over a certain amount of months and pay it back. Once you’ve made all the repayments, the car is yours!

But what’s your best option?

HP car finance

HP is a pretty good option for self-employed workers planning on owning a car for the long term. While they pay more upfront, they’ll actually own the vehicle at the end of the period, meaning they can keep it for years or sell it. Of course, you can own it with a PCP too – but you’ll have to cough up a couple of grand for the final balloon payment.

The downside of an HP deal is the monthly repayments. It can be considerably more than a PCP deal. So ultimately, it depends whether you want to swap your car out every 3 or 4 years or suck up the higher payments and own it outright soon.

PCP car finance deals

If you don’t plan on keeping a car for more than 4 or 5 years, a PCP might be a better deal.

When compared to an HP, you pay significantly less money a month. You’d have to make a balloon payment at the end of the contract if you wanted to buy the car outright. You can either hand the vehicle back or take out a new deal if you don’t. Many self-employed drivers happily do this and enjoy switching out their cars every three years.

The PCP is really useful because you don’t have to make your mind up at the start. If you decide that you love the car and want to keep it at the end of your contract, you have the option to – assuming you can afford it. Ultimately, it’s a personal choice.

One thing to note about Personal Contract Purchase deals is that you’ll have a mileage limit. You’ll have to pay harsh penalty charges if you drive over this.

So if you log a large number of miles a year, HP is probably a better option for you.

Personal Contract Hire (PCH) car finance

So we all know about PCPs and HPs…but what on earth is a PCH?!

A PCH is a Personal Contract Hire and is basically a lease deal – meaning you essentially rent the car over the contract term (usually between 3 and 5 years).

A PCH is for self-employed drivers who know that they don’t want to own a car. They just want a decent and reliable vehicle for three years, and then they’ll take out a new deal after.

Ultimately, PCH is the most convenient of the above finance options and offers the lowest monthly payments. However, you will never own the car, meaning you’re sinking money into driving it that you can never get back (by way of selling). But, It can be a stress-free way of getting a new car if you can afford it.

Like a PCP, you will have a mileage limit you must keep to or face penalties.

Personal Loan car finance

Ahh, yes, the good old fashioned way! This was the most common way of getting a car (aside from buying it upfront). You’d walk into a bank, give them some information, sign on the dotted lines and walk out with a loan to go and buy a car.

This is still a common method of car finance and one that we rate highly. The main benefit of a personal loan is the simplicity and freedom you have. You can buy a car wherever you like when you receive the money. You’re not restricted to specific dealers. Ultimately, the bank doesn’t care – as long as you make your repayments!

The main thing to think about with personal loans is the interest rate. The rate offered can vary significantly based on your credit and financial history but can even change from year to year.
With that in mind, it’s worth comparing your loan interest rate to a Hire Purchase deal. They both function similarly, so choose the one with the lower interest rate!

How do I improve my chance to get car finance when I’m self-employed?

When self-employed, you must be well organised. Without a payroll department and accountant, you’ll need to be on top of your financial documents.

Before you apply for car finance, it’s worth strengthening your finance application the best you can. Read on to find out how to do this!

Check your credit score

Make sure you’re aware of your credit history and how good your credit score is. Nowadays, this is a breeze to do. We often recommend Equifax, Experian, or TransUnion. You can do this in less than 5 minutes.

It’s essential to check your credit score periodically, usually once a month. You want to check for inaccuracies, errors, or any misunderstandings that could adversely affect your credit report and, ultimately, your chance to get car finance.

Checking your credit file will give you complete visibility on what you’re doing right and wrong. If something is negatively impacting your credit score, you should be able to see it on the credit report and alter your financial behaviour to improve it.

Ensure you have proof of income and that your finances are in check

Whether you’re self-employed or not, you have to be able to demonstrate a good financial history.

Before you apply for a car finance deal, it’s vital to get your finances in order. Make sure you have evidence of proof of income that is trustworthy and reliable.

You’ll have three years of relatively consistent earnings and a steady income in an ideal world. If this is the case, you should have no problem getting self-employed car finance.

It might be harder to prove you’ve got a steady income if you’re newly self-employed. In that case, you’ll want to make sure your outgoings are as low as possible.

If you can, try to cancel any non-essential subscriptions or payments and settle old loans and debts. Also, make sure you close any joint bank accounts attached to people with a poor credit history.

Register on the electoral roll

It’s an old classic and probably the easiest to do on this list. Make sure you’re on the electoral roll!

To register is vital as lenders will often check you’re on it to confirm your address and facts as part of a credit score check. Also, being on the electoral roll gives your car finance application more credibility.

Provide lenders with up to date trading accounts

Naturally, the more years of information and trading account data you can provide, the better. A more extended history means more time to prove your eligibility and ability to meet repayments.

Three years of history used to be the gold standard, but as more and more people become self-employed, lenders have relaxed their stance. You can often find a self-employed car finance deal with 1 or 2 years of trading account history.

Be prepared to show lenders your personal bank statements if you are new to self-employment

If you’ve been self-employed for less than a year, your private bank account must be in good standing – as you’ll likely need to show these statements to a potential lender. It’s essential to make sure nothing could damage your application: try and avoid using any gambling services before applying for a vehicle finance deal.

Be honest with potential finance providers

Never exaggerate your income. Always be upfront and honest about your pay – or it’ll come back to bite you.

If a lender looks deeper into your details and finds out you’ve been fibbing, they’ll turn down your loan, which can really damage your credit rating.

If you think you have absolutely no chance of success, don’t apply to more than one lender. Take a few months to build up your credit rating before trying again.

Put down a large deposit if you can

A larger deposit means less risk for the lender. If you can afford to put down something like a 20% deposit, your chances of getting accepted for a self-employed vehicle finance deal are much higher.

Even if you can’t afford a big deposit, even 5-10% will improve your chances. Also, it’ll reduce your monthly repayments!

Consider a guarantor loan

If you’ve tried everything you can, and you just can’t get a car finance deal, consider a guarantor loan.

Guarantor means having someone else agree to be your backup: so if you fail to make the repayments, this person will step in and cover for you. Of course, this requires a lot of trust between you both, and it’s most common for this person to be a close family member, like a parent.

While this might not be the most comfortable option, it’s still an option – and it might be the only one if you’re struggling to show proof of income or have a poor credit history.