Becoming self-employed has rapidly grown in popularity over the years, with changes to the economy and the digital revolution being persuading factors. Moreover, there are a number of benefits of doing so, including lesser taxes, greater flexibility and a good work-life balance. However, while such perks are great, people who are self-employed tend to have a harder time securing loans and finance.
Read on for our handy guide on how to get either PCP or HPA car loans if you are self-employed and a UK resident.
Why is it harder for self-employed people to get car finance?
Many loan lenders will argue that self-employed people are more “risky”, since there is the added challenge demonstrating a regular source of income from which repayments are of course necessary. One standpoint is that self-employed people’s incomes are prone to extensive fluctuations and seasonal discrepancy.
Securing a loan when self-employed will prove even harder – and may be unachievable – if you also have a bad credit rating on top of this. This is because the loan provider will see you have struggled managing debts before and will judge you as high risk. In essence, finance companies are trying to protect themselves.
So, how do I get a car loan?
Getting car finance as a self-employed person will most probably prove more difficult than those who earn what is considered a ‘steady income’, but it is certainly achievable. A self-employed person will simply have to do a little more to prove their income can pay off the loans.
All respected lenders will ask to see proof of your ability to make the repayments and this will typically involve sending over bank statements from at least the last three months. This takes place during the pre-application check stage.
It is important to note that cash-in-hand will not count as a source of income for these purposes. Only money which goes into a UK bank account in your name (or your spouse’s) will be calculated. Likewise, tax returns usually do not count as proof of income either.
The lender will also ask to see your employment and address history for the past three years. The longer you have been doing your current job and living at your current address, the better, since lenders are, above all, looking for evidence of stability. As such, if you have not been a UK resident for at least three years, it is likely you will be rejected for the loan.
Our top tip is to be as honest on your application as possible. Exaggerating your income and other details is not a good idea, since lenders have experience in detecting fraud and the consequences of such can be serious.
Can I apply as my business?
Self-employed individuals can apply on behalf of their business, provided they have been trading for at least two years. Furthermore, your net profit should be more than double the amount you are seeking to borrow.
When applying as part of your business, questions to answer will include the type of business you operate and whether the car you are looking to purchase under finance will be for business use.
Whether you receive a loan or not will depend on the kind of business you are (limited, sole trader, partnership). If you are a sole trader then you would apply under the name of your company. If you are a limited company, you can also do this, though the finance lender may well ask for a director’s guarantee to lessen the risk.
What else can I do if I cannot show proof of income?
If you are having difficulty proving your income, do not lose all hope, as you may still be able to get a car loan. There are other things you can do to try and improve your profile, including:
- Ensure your credit score is as solid as possible – there are many free tools out there
- Check that you are definitely on the electoral register here
- Provide a substantial deposit so that the loan amount and risk to the lender is shared
- Consider submitting a joint application if need be
- Have a guarantor for your application (your Dad counts!)
So there we have it, a pocket-sized guide to securing a car loan. Now, sit back, relax and enjoy being your own boss.