If you are looking to buy a car, it could be a bit challenging to finance it if you are self-employed. Whether you borrow money from a bank or a direct lender, you are supposed to show your income to ensure that you will not fall behind in payments.
Income stability is a must to convince a lender that you will not fail to keep up with payments. For self-employed, it is harder to qualify for a loan to buy a car. Apart from inconsistent income, a poor credit score is what can keep you from qualifying for a loan.
Lenders could be sceptical about your repaying capacity despite a good credit rating. The reason being your financial situation does not seem to be strong enough.
Is it possible to get a car loan as a self-employed?
It is not impossible to qualify for a car loan if you run a business. It is quite obvious that you will not have a fixed amount of money every month as remuneration, so a lender will get an idea of your repaying capacity after perusing your bank statement and income statement.
Generally, lenders ask for a bank statement of at least six months. In the event of the absence of both statements, it will be all but impossible to qualify for a car loan. If you have just started your business, lenders will hesitate to sign off on your loan.
It is always suggested that you apply for the loan after completing one year of your business. Here are some of the tips to help you get the best car finance for the self employed.
1. Aim at proving stability in your finances
A lender knows very well that you cannot have stability in your income as in the case of an employed person. However, you can still prove that you can manage to pay back the debt. For instance, when you hand in your bank statement, make sure that your income is able to maintain a level.
Your sales each month will vary if you are a storekeeper, but if it reflects a fixed sum of money that you earn every month, you can qualify for a car loan. As a self-employed, you do not need to withdraw your salary, but you can implement this system every month.
Take into account the number of sales you make every month. Find the average and withdraw it as your salary. The rest money will go toward your savings. Make sure that the money you withdraw covers all of your monthly expenses.
When you give yourself a salary every month, you can use this as your fixed income at the time of putting in an application for a car loan. You will undoubtedly qualify for the loan if your budget has wiggle room to pay down the instalments in addition to your monthly expenses.
2. Put down a larger deposit
You can get a car loan after making an upfront payment of up to 10% of the market value of the car. If your income is not stable or lenders are not able to count on the proof you have shown, you can persuade them by putting down a larger down payment.
Try to make it up to 20% as you will have to borrow a less amount of money. This lowers the risk of a lender. As a result, they would get ready to lend you money. The best part is that you can enjoy lower interest rates.
This is also important when your credit score is not good. Technically, it is suggested that you should have an impressive credit rating if your income is not stable. If your credit report is also not good, you might have complications getting the nod for these loans.
Some lenders may not entertain your deposit, putting down a larger deposit. Try to improve your credit score before applying for these loans. Credit builder loans can help build our credit. Further, you should pay off all utility bills, debt payments, and credit card bills on time.
3. Try a guarantor or seek a joint loan
Consider arranging a guarantor when your lender is not ready to lend you money. This is true in the case of poor credit ratings. When a third party enters into an agreement and promises to pay off the debt when you make a default, a lender would likely be more willing to lend you money.
A guarantor lowers the risk of a lender as they can call them upon to make the payment when you fall behind payments. Unfortunately, it is not easy to arrange a guarantor because fearing that you will make a default, nobody would take on the risk of having their credit score affected.
Keep in mind that the guarantor will also lose credit points when you make a default. If that is not feasible for you, you can think of taking out a joint loan. If your partner has a good credit rating, you will likely get your loan approval.
Your lender will take into account your partner’s income as well, so your unstable income will not come the way of approval. Both of you are responsible for making the payment. Though it seems easy, you should carefully analyse it so that you will not fall behind in payments.
4. Check your affordability
It is all well and good that your credit file is up to scratch, and you could prove stability in your income, but can you actually afford to pay back the debt? Having stability in your income is one thing, and being able to repay the debt is another.
You should carefully examine your repaying capacity before you fill in the application form. If a lender sees your budget will collapse after making a couple of payments, they will not lend you money.
Online loan calculators are out there. You can use them to get an idea of how much it would cost you. With estimated cost, you can see if your budget has a scope to meet this expense on top of your recurring expenses.
As the actual cost would be a bit higher, you should carefully examine if you have the wiggle room. If you fail to keep up with payments, you will not only lose your credit points, but you will also end up paying accrued interest.
The final word
Even though it can be a bit challenging to qualify for a car loan as a self-employed, you can get a car loan at affordable interest rates. Though you cannot show stability in your income, make sure that you are making enough money to keep up with payments.
Do not forget to have a good credit score. Despite a good repaying capacity, you might be refused attractive interest rates because of a bad credit score. Pay off all your bills on time to avoid taking a toll on your credit score.
If you still face difficulty, you can take out a joint loan, provided your partner has a good credit score and strong repaying capacity. You can also arrange a guarantor with a good credit rating. You can put down a higher deposit size for your car as a last resort.
