If you are self-employed, you may think that you cannot get car finance, but there are some lenders that entertain applications from people like you. However, getting it is not as easy as it seems. Lenders will less likely be interested in signing off on your application when your income is less predictable. Before you dive into finding the best deal, there are many things you should know. This blog discusses each aspect so you can get the best deal without any hassle. 

Car finance is not a car loan. It involves three types of financing methods: hire purchase, personal contract purchase and personal loans. The first two deals are offered by a car dealer, and personal loans are offered by a direct lender. 

If you want to finance your car with a direct lender, you will have only one way to do so – auto loans. They are a sort of personal loan as you do not need to submit an additional valuable asset as collateral. Your car itself will serve the purpose of security, but you are free to use it as much as you want. 

If you fail to pay off your debt, the lender will cash your car out. Borrowing money to buy a car as a self-employed can be challenging as you will have to give income proof, and some lenders would require you to have a good credit score, but you can still qualify for a car finance deal. 

What documents do you need to apply for self-employed?

Whether you are looking to seek a deal from a car dealer or a lender, you will have to provide the following documents to show your eligibility.

• A down payment

You will have to pay 10% of the market value of the car as an upfront cost. No lender will lend you 100% of the whole market value of the car. You are free to pay down as much as you want to pay. By paying down more than 10%, the loan size will reduce, lowering the risk of a lender, and hence you will likely get money at the most competitive interest rates. 

Some lenders will allow you to get a car finance deal without a deposit, but you should be careful as it can be very expensive. Comparing the deals with and without the deposit is suggested before applying for it. This will help you choose a more favourable deal. 

• Credit score

A credit score plays an imperative role in deciding the interest rate. Though you can apply for car finance for self employed with bad credit, improving your credit score before it is suggested. Lenders generally prefer good credit history, especially if you are self-employed. 

Lenders would want you to strengthen your application by having a good credit score because your income is not predictable and stable. Before you put in the request, you should ask a lender about a quote. They will likely tell you if you are able to get the loan based on your current scenario. 

However, a pre-qualifying quote does not involve running a hard credit check, and therefore the lender would not know your actual credit rating. The actual decision may vary at the time of the real-time application process. 

• Proof of income

As a full-time employee shows pay slips, you will also have to give proof of income. Since you do not have a pay slip, you may need to submit a bank statement, income statement, and the like. You will have to submit invoices if you are into a part-time job or freelancing. However, your earnings must be sufficient to be able to clear your debt. Here are the documents that you may use to prove your income. 

• Bank statement of a previous couple of months. Some lenders may ask for a bank statement of three months, while others may ask for six months, depending on their criteria. 
• You will have to provide your income statement for at least one year. If your business is less than one-year-old, you will have to submit your growth plan to convince your lender that your business is profitable. 
• A lender may also ask for your tax return to get an idea of your total revenues and net profits. 

Tips for increasing your chances of getting the best deal

If you have a poor credit history, it might be challenging to secure the best deal, but there are certain ways to show yourself in a stronger position.

• Improve your credit rating

You all must be aware of the ways to boost your credit score. First off, you need to get a 

copy of your credit file to see if there are any errors that can damage your score. To boost your credit rating, you must not have any outstanding debts. 

In fact, some lenders will require you not to have any other debt obligations at the time of seeking a car finance deal. If you own multiple accounts, consider debt consolidation loans in the UK for bad credit. 

Managing outstanding debts individually will not boost your credit score, but consolidation loans can do so as payments will be made in fixed instalments. Instead of a lump sum payment, payments made over time give a boost to your credit rating. 

• Get a co-applicant

With bad credit history, your application may seem weak to a lender. They will be sceptical about your repaying capacity. You may need to arrange a co-applicant with a good credit history to strengthen your profile. It can be your spouse or friend, but they will be looked at as a second borrower. 

The lender may offer you better interest rates, but chances are it is still higher. If you cannot arrange a co-applicant, you should try to find a guarantor with a good credit score. A guarantor is not responsible for paying off the debt unless you make a default. 

Although this is an option, the reality is that hardly any person becomes a guarantor as your default would also pull their credit points. Nobody would like to risk their credit score.

• Be realistic

Borrowing a reasonable amount of money is the key to qualifying for a loan. Even if you are borrowing just 70% of the value of your car, you must be able to pay off the debt. If your income does not justify it, your application will be straightaway turned down. 

By using an online calculator, you can estimate the size of monthly payments. You can easily check if your budget has the scope for paying this much money every month. The actual payment is generally more than the estimation, so keep enough wiggle room for additional funds. Get a pre-qualified letter so you know how much you can borrow.

The bottom line

It is possible to get a car finance deal when you are self-employed, but you will have to prove your income. Make your application stronger by improving your credit score and submitting a larger deposit size. 

Do proper research to check which finance deal will suit your budget. Get a pre-qualified letter to get an idea of how much money you can borrow. 

Description: You can get a car finance deal when you are self-employed, but your credit score and repaying capacity should be good.