Striking out on your own has never been more popular. And with over four million self-employed people working in the UK, if you’ve chosen to work for yourself, you definitely aren’t alone.
But how does it affect your chances of finding car finance?
No matter whether you’re a sole trader or own a limited company, work as a plumber, electrician, graphic designer, or small business owner, the one thing that all self-employed people have in common is that your income is unpredictable.
You might find that this uncertainty is a fair trade off for the freedom that self-employment can provide, but it can make it tough to manage your finances.
Over time, you can start to understand seasonal ebbs and flows so you can keep your income more consistent (or build up savings to see you through the lean times) but lenders don’t necessarily have this confidence. For many car finance providers, unpredictable income = high risk borrower.
The good news is that while Hire Purchase (HP) and Personal Contract Purchase (PCP) finance deals can be harder to get if you're self-employed, it’s not impossible.
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There are lots of great things about being your own boss. You can often decide your own hours, choose the projects you take on or turn down, and work from home in your pyjamas all day if that’s your vibe.
But it’s not a risk-free route to choose.
When you strike out on your own and become self-employed, you’re signing up for uncertainty. You quickly come to understand that your income can change every month, you won’t get paid if you go on holiday or get sick, and you’ll probably have some extremely busy periods followed by quieter weeks when you start worrying you won’t ever work again!
All these financial unknowns can make it more difficult for you to get car finance when you’re self-employed.
Most lenders are risk averse. They like to feel reassured that you’ll be able to make your monthly payment in full and on time no matter what.
The more you can do to put their minds at ease with proof of income, the more likely it is that you’ll be able to get car finance.
Different lenders can have different eligibility criteria and might ask you to provide different documents, but most self-employed car finance applications will need to include:
As a self-employed worker, you likely won’t have payslips that you can use to prove your income, but there are alternative options available to show lenders how much you earn on average – and how much you can afford to spend on your monthly repayment:
You might need to provide up to three months’ bank statements showing how much has come in and out of your account. They may ask you to provide just your business account or your business and personal accounts.
As a self-employed person, you’ll likely submit a self-assessment tax form at the end of each financial year. This can be used to show the lender how much you earn over the course of 12 months. You might be asked to submit more than one year’s tax return if you’ve been trading for a few years.
Some self-employed people own limited companies and must submit trading accounts each year. These can also be found on the Companies House website.
While there are no tips and tricks that we can share that can guarantee you’ll get car finance, especially if you’re self-employed, you can take steps to weigh the odds in your favour:
Credit scores are never fixed, and you can make changes to help yours grow over time. Making payments on time, registering on the electoral roll, and spacing out your hard credit searches can all help you build a better score.
While large deposits aren’t essential, the more you can put down upfront, the less you’ll need to borrow to buy the car. This lowers the risk to the lender and could improve your chances of securing finance.
While it might sound obvious, entering the wrong details when applying for car finance can affect your approval. Make sure you haven’t missed a zero in your monthly income or accidentally entered an old post code, just in case.
Just like putting down a large deposit, choosing a cheaper car can reduce the amount you need to borrow and lessen the risk to the lender. You might find that you’ll qualify for a £10,000 loan, for example, but might struggle if you wanted to borrow £15,000 or more.