As of July 2021, there are roughly 4.3 million self-employed people in the UK. While there are many benefits of being your own boss, a few things make life a little more complicated when you’re self-employed.
One of those things is car finance — and the answer to ‘can I get car finance if I’m self-employed’ is yes, you can. But it’s not as easy as it would be if you were employed by a firm that provides you with a regular income.
We’ll dive into the following areas to discuss car finance for self-employed people:
- What is car finance
- Why it’s harder to get car finance if self-employed
- How to improve your chances of getting car finance
What is car finance
Car finance is the process of buying a car, but you pay for it in instalments, with added interest like you would with a loan. The lender still owns the vehicle until you make the final payment and your ‘loan’ of money from them is paid off.
Why it’s harder to get car finance if self-employed
To get any loan, a lender (be it a bank or a car dealership) will want to see that you have good credit and are in a stable financial position to make your repayments.
The trouble with being self-employed is that you may not necessarily have consistent, stable work — you might make more one month and less the next. This can be a risk for lenders to lend you money for a car because they want to know you will repay them consistently. Without previous payslips of the same amount, it can be challenging for self-employed people to prove they have a stable amount of income to pay back in the long term.
Usually, lenders will ask for proof of your income over a long period. For example, an employed person might have to provide six months worth of bank statements. Then the lender will use that to take an average of their monthly income to calculate how much they can lend. Because a self-employed person’s income can fluctuate or be seasonal, they may ask for statements from the previous year.
How to improve your chances of getting car finance
So what can you do to swing things in your favour? First of all, provide as much information to the lender as possible. Lenders are looking for evidence of stability in employment and address history – so the longer you have been at your current job and address, the better.
Checking your credit score
First, check the information on your credit report with a credit agency such as Experian, Equifax or Trans Union. When applying for a loan, the lender will run a check on your credit file. Your credit score will indicate how much credit (money on loan) you can access. The report will show personal details such as your name, address, whether you’re on the electoral roll, if you claim any government benefits, or if you have any convictions.
Your credit report will also detail your financial history and current credit status. For example, it would include if you have an existing loan, an account overdraft, any missed loan payments (default) and even the number of loan applications you’ve made in recent months.
Check your file for errors or out-of-date information that could reduce your credit status to lenders. If you see anything wrong, contact the agency and see if they can amend the credit report.
Proving your income
The lender will usually take an average of your monthly income to determine how much you can borrow from them. As mentioned, a self-employed person will usually have to provide more bank statements across a longer period to show that their income is stable and relatively unaffected by the seasons. This proof will reassure the lender that you can afford to pay them back all year round.
The proof you provide must have your name on it. For example, lenders won’t accept cash in hand payments, and your business statements will have your company name on them, so you’ll have to show that your business pays your wages into a bank account in your name.
Applying through the business
Many lenders will not offer loans where the car is going to be used primarily for business purposes. This is because the vehicle will experience more significant wear and tear and higher mileage than personal cars.
Say you’re applying specifically for a business vehicle with a lender. Firstly, your business will usually need to have been trading for a minimum of two years. Usually, lenders will take proof of your net profit as financial reassurance.
They will also look at the purpose of the vehicle. For instance, some lenders won’t finance a car for self-employed taxi drivers or driving instructors because, again, these cars will experience more wear and tear and higher mileage, which affects the car’s value.
Using a guarantor
You can also consider guarantor finance. This type of finance is where another individual takes on the responsibility of paying the loan if you cannot repay it. They will need to have a good credit score and be able to demonstrate their financial stability too. The guarantor makes lending the money less of a risk for the lender as they have someone who will take on the debt if you cannot.
Put a larger deposit down
If you can afford it, use a larger deposit for the purchase. A larger deposit will mean you need a smaller loan to buy the car, which makes you less of a risk to the lender, and they may be more likely to offer you a smaller amount of money.
Managing your finances easily with Countingup
Managing your self-employed income can take up a lot of your time when you’re running a business. Luckily there is software out there that can make monitoring your money much easier. Countingup is a business current account and accounting software in one app that saves business owners hours of accounting and bookkeeping admin.
The app automates a lot of the time consuming manual tasks associated with your financial obligations. For example, it can help you create invoices in seconds, reconcile invoices once paid, automatically categorise your expenses and total up a tax estimate, so you’ll always know how much you owe HMRC.
Countingup is saving business owners hours of time-consuming bookkeeping admin and helping thousands keep on top of their finances. Find out more here to save yourself hours of accounting and financial admin, and get back to what you do best – running your business.