A Guide to Car Loans for Self-Employed People

There are many benefits to becoming self-employed, including greater flexibility, a healthy work-life balance and lower tax rates. And while these are all fantastic persuading factors, it may also be the case that self-employed folk often find it more difficult to secure finance and loans. This is because these types of borrowers are often deemed more ‘risky’, as many find it hard to prove a stable income.

When applying for car finance, you need to demonstrate that you are capable of making steady repayments. Self-employed people may not have a regular source of income like traditionally employed people, particularly where their business is relatively new.

Fear not, though, there are certain steps you can take to ensure you are still able to secure self employed car loans as a UK resident.

How to get one

Obtaining your car loan as a self-employed person is most likely going to prove to be a little trickier than it would be if you were earning what lenders would describe as a ‘steady’ income. However, it is still within your reach, you’ll just have to do a little more to prove you are capable of making loan repayments.

During the pre-application stage, all reputable car finance lenders will require proof of ability to pay off debts, which typically involves sending over bank statements from three months prior to your loan application. If your business mostly deals with physical money, it is worth noting that cash-in-hand does not count as a source of income for loan purposes, so it’s a good idea to start dispensing your earnings into a UK bank account in yours or your spouse’s name. Likewise, tax returns also do not typically count as a proof of income.

You also need to have permanent UK residency, as the lender will need to see proof of address and employment history for the past three years. Lenders are looking for evidence of stability, so it will certainly look better on your application if you have been at your current address and place of work for a substantial amount of time.

Applying as your business

You may also wish to apply on behalf of your business, but you must have been trading for at least two years prior to application. Moreover, your net profit needs to be more than double the amount that you are looking to borrow.

You’ll need to answer the above questions upon application, plus some additional ones, like what type of business you operate and if the car under finance will be used for business purposes. Sole traders can apply under their company names. Limited companies can also do this, but the lender may also ask for a director’s guarantee in order to reduce risk.

Other ways to prove your income

Self-employed people often find it harder than others to prove their income, but there are still ways to maximise chances of getting approved for a car loan, including:

• Having a good credit score
• Making sure you are on the UK electoral register – check here
• Providing a substantial deposit to ensure the loan amount and risk to the financer is shared
• Consider submitting a joint application
• Providing a guarantor for your application (e.g. mother, spouse), who will agree to take responsibility for payments if you cannot

Honesty is the best policy

Being completely open and honest on your loan application is highly recommended, since exaggerating or lying about income or other factors can lead to serious fraud claims, which finance lenders are specifically trained to detect.

Good luck!