How to Find Car Finance for Self-Employed Workers

When most people get a car, they need financing to help them afford it. It’s relatively easy for traditionally employed people to secure financing, but if you’re self-employed, you may struggle due to the nature of your occupation and the instability of your income.

Thankfully, there are many things you can do to overcome these challenges and potentially get the financing you need.

Read on to learn more about the challenges self-employed individuals face when securing car finance, tips to boost the chances of approval, and the most common car finance options to consider.

Key Takeaways

• Self-employed individuals often face challenges when securing car finance because their income typically fluctuates, and they don’t have a traditional way to prove income.
• As a self-employed person, you might increase your chances of getting car finance by properly preparing, improving your credit, making a large deposit, choosing the right lender, or having a guarantor.
• Those looking for self-employed car loans have several options: personal loans, leases, hire purchases (HP), and personal contract purchases (PCP).

Obstacles Self-Employed Workers Face When Securing Car Finance

Here are common hurdles you may face as a self-employed individual trying to secure car finance:

Inconsistent earnings

The main challenge for self-employed workers when obtaining car financing is the lack of a steady income. While some self-employed workers make a consistent income every month, it’s much more common for earnings to fluctuate from month to month, depending on your workload, clients, and contracts.

Many lenders see this as riskier than dealing with someone with steady earnings, as there’s no guarantee that the self-employed borrower reliably earns enough every month to make the car payment.

No traditional proof of earnings

Similarly, providing proof of income to a lender is more challenging for self-employed individuals. Although there are still ways to prove income as a self-employed individual, they’re not as clear and straightforward as handing a lender a payslip or your P60 form for the year.

Generally, you’ll need to bring multiple years of tax returns or months and months of bank statements to prove you earn what you say you do. It takes time to gather and organise this information, and it’s a tedious process that most people with traditional jobs don’t need to do.

Strict lender requirements

In some cases, lenders may also have specific requirements that are difficult for self-employed people to follow.

For instance, a lender may have a strict debt-to-income ratio requirement. This ratio compares your monthly income to the amount of your monthly debt payments. For example, if you make £4,000 a month and have £1,000 in monthly debt payments, your debt-to-income ratio is 25%.

Because many self-employed people and business owners may rely on borrowing money to purchase materials, lease equipment, or rent office space, it may lead to an inflated debt-to-income ratio at times.

Also, because self-employed individuals’ income typically isn’t consistent each month, their debt-to-income ratio may be higher in some months and lower in others.

These lenders may also have rigid employment requirements or require a steady and stable income every month, which may introduce issues for self-employed workers.

Available Car Finance Options

When you’re looking to finance a car in the UK, you have a few options.

Personal loan

The first option is a personal loan to buy a car. These auto loans involve borrowing enough to pay for the car in full and then paying back the loan over time, plus interest. Various lenders offer these personal loans, which typically come in terms of 1-5 years, though some may be up to 7 years.

A benefit of opting for a personal loan is that it’s unsecured, so there’s no collateral needed. This means you don’t risk losing your car if you’re unable to keep up with repayments. However, because of the greater risk for the lender, these loans often have higher interest rates than other options.

Hire purchase (HP)

Another option is a hire purchase (HP), an agreement where you pay an initial deposit and then take the car and begin using it. From then on, you make monthly payments toward the cost of the car. You don’t own it until the final payment is made, and you pay a small “option to purchase” fee.

An HP is also a type of secured financing, so you could lose the vehicle if you stop making payments. However, interest rates are generally lower because the loan is secured and there’s less risk for the lender.

Personal contract purchase (PCP)

A personal contract purchase (PCP) is a relatively complex option but one that remains popular due to its flexibility. Three parts go into a PCP:

• Deposit: You make an initial deposit, generally around 10% of the car’s value.
• Monthly payments: You’ll make monthly payments towards the car based on its value (minus the deposit and balloon payment), plus interest. These monthly payments are often smaller than what you’d get with a loan or HP, as the car’s entire value isn’t spread out over them.
• Balloon payment: PCPs have a one-time final payment, known as the balloon payment, that you need to make if you want to own the car officially. The balloon payment is generally a pre-agreed-upon amount based on the car’s estimated value at the end of the contract term. Instead of making this payment to own the vehicle, you also have the option to return the car or trade it in for a different car and start a new PCP contract.

Everything—from the deposit and the monthly payments to the contract length and the final balloon payment—is generally agreed upon at the start of the contract.

PCP financing often has low monthly payments and is a good choice for people who frequently change cars. The downside is that PCP contracts often have high interest rates, and there may be steep penalties and fees if you don’t adhere to the agreement’s terms.

Leasing

You can also lease a car, meaning you make monthly payments to use the car but never own it. That said, some leases may have an option to buy the vehicle at the end of the term.

The amount you pay each month depends on the car’s value, the length of the lease, and your mileage allowance.

While the monthly payments are generally lower with a lease than other options like a loan or HP, there may be other costs. These include paying for mileage beyond the set limit or covering the cost of excessive wear and tear on the vehicle.

Tips for Potentially Securing Car Finance as a Self-Employed Individual

Now, let’s explore some strategies to potentially increase your chances of being approved for car finance as a self-employed worker.

Prepare and gather your financial documents

Each lender has different requirements for self-employed individuals, but many ask for a few months of bank statements and the last few years of tax returns to prove income. These lenders may also ask for information about your employment status, other debts, personal details, and residential status/address.

Gathering all this information can be stressful, so do your best to start early and organise everything, such as in a folder. This way, you’re less likely to misplace anything—which is crucial since you’re unlikely to be approved if you’re missing key documents.

Improve your credit

Your income and other debts influence whether you receive car financing, and so does your credit history.

A bad credit score doesn’t immediately disqualify you from car finance, but it makes it much more difficult to obtain. Even if you get approved, the rate and terms may be worse than if you had good credit.

As a result, before you apply for car financing, try to improve your credit. Some things you’re able to do to increase your credit score include:

• Making your debt repayments on time and in full
• Keep your credit utilisation low (generally 30% of your limit or lower)
• Check for and fix errors on your credit report (your credit provider should be able to help with this)
• Pay off your existing debts

It won’t happen overnight, but your score should improve if you practice good credit habits. Once your credit score is better, you should have an easier time securing high-quality car financing.

Have a large deposit

A large deposit (also known as a down payment) also boosts your chances of being approved. This is because providing a sizable deposit reduces the lender’s risk, as you’ll borrow less and thus have smaller monthly repayments to make.

For example, someone with a £700 monthly payment is generally at a higher risk of not successfully repaying the loan than someone with a £300 monthly payment.

The exact deposit you should aim for depends on the price of the car, but saving up as much as possible is a good practice.

In addition to making it easier to secure financing, a large deposit can save you money in the long run. You’ll end up borrowing less for the car and paying less interest over the years.

Choose lenders experienced in working with self-employed people

Try to choose a lender specialising in working with self-employed people. These lenders are focused more on your ability to make payments and not so much on your employment or whether you earn the same every single month.

Many are also comfortable with the unique nature of dealing with self-employed borrowers and may work with you when other lenders won’t.

Some lenders advertise as “self-employed friendly,” but you may need to contact the lender or check its website to see if it would be open to working with you.

Consider having a guarantor

If you’re unable to find car finance no matter what you try, you may consider working with a guarantor. This is a person who agrees to pay back your loan if you’re unable to do so.

If you have bad credit or an inconsistent income that makes you too risky to a lender, working with a guarantor may reassure the lender that you won’t miss payments.

It’s essential to confirm the guarantor knows the risk they’re taking and ensure it’s someone you can trust to make payments if you can’t. While technically anyone may be your guarantor, it’s generally a family member or close friend.