Car finance on benefits

Can I get car finance if I’m on benefits?

You should be able to get car finance if you receive benefits, but there are several things you should know.

If you need to buy a car, but can’t afford to pay for it up front, don’t fret – even if you’re on benefits, you should be able to take out a car finance agreement. But there are some things to consider before you apply.

The most important element is to be realistic about what you can afford. If you’re on a low income you’ll need to work to a budget that you can afford, and look at cheaper cars.

In this article, we’ll look at the different types of car finance that could be available to you.

Will a lender consider me if I’m on benefits?

Finance providers consider each applicant on the basis of risk. They want to know that they’re going to get their money back, and your chance of acceptance is dependent on that. Some will be risk averse when it comes to applicants on benefits, but not all. Indeed, there are some firms that specialise in higher-risk customers. According to the Department for Work and Pensions, 22.6 million people in England, Scotland and Wales were claiming some kind of benefits in August 2023, so lenders will be used to these circumstances.

Most will consider applicants based on their specific circumstances. While a low credit score could be classified as high risk, someone on benefits won’t necessarily have a bad credit history. If you have a reasonable record of repaying credit on time – such as regularly paying off a credit card – then you could have less trouble being accepted for finance than you think. If this is the case, you could try traditional lenders before resorting to specialists.

Lenders will get information on your credit history from credit reference agencies. Before you apply, it’s worth checking your records with them and making sure they’re accurate. Tell the agencies if anything’s wrong, and they’ll investigate and, if necessary, correct it.

As well as a credit check, lenders will want information on your financial status, such as proof of income, employment status and your regular outgoings. This gives you a chance to make the case for your approval and show that you’re a responsible borrower.

Is car finance different if I’m on benefits?

No, car finance is the same for people on benefits as for anyone else. The only likely difference is in the terms of your deal, as reflected by your perceived risk as a borrower by the lender. If a lender is less confident in your ability to repay, because of limited income or a history of missing payments, they may offer you higher interest rates or decline your application.

Different lenders perceive applicants in different ways, so it’s worth shopping around for quotes. This will ensure you get the best deal available, and also highlight any less reputable dealers that charge overly high rates.

Watch out for predatory lenders

Some lenders will seek to take advantage of those that struggle to get credit, charging extortionate interest rates. Generally you can expect rates of around 10 percent to 20 percent, but these disreputable lenders can charge hundreds or even thousands of percent. They are to be avoided, as repaying them will cost you far more than you borrowed, and it’s much more likely that you’ll end up in dire financial straits trying to meet the payments.

Similarly, you should be aware of loans that promise too-good-to-be-true rates. If you’re buying a car through a dealer rather than a manufacturer, and it’s advertised with a surprisingly low interest rate, the chances are that the cost of the credit has been added to the car’s price. Again, compare the cost of the car with other similar vehicles from other retailers to make sure you’re not being charged a high premium.

‘Guaranteed’ loans, application fees and disability discriminations 

It’s illegal for lenders to guarantee to lend you money, because by law they have to consider your credit score and your financial position. If a firm promises that you’ll be accepted without checking this information, they’re breaching the 2010 Consumer Credit Act that prohibits making false or misleading claims in relation to consumer finance. Stay away from firms like this – they’re not to be trusted.

Watch out too for finance brokers who charge an application fee, which can sometimes be several hundred pounds. While this fee might be described as refundable, it could be difficult to get your money back in practice. Plenty of lenders don’t charge an application fee, so it’s best to avoid the ones that do.

It’s illegal for lenders to discriminate against your physical or mental condition, so if you receive benefits related to this don’t let finance companies use them as excuses for denying your application or increasing the cost of borrowing. Most companies won’t do this, so walk away from any that do.

Don’t make too many applications

Each time you make a loan application, a record of it is made in your credit history. Be wary of making too many applications, as it can look to lenders like you’re desperate and at risk of borrowing beyond your means.

There’s a difference in credit history impact between making a formal loan application and getting a quote – known as hard searches and soft searches. It’s worth knowing more about this to avoid overly impacting your credit score. And it’s another reason to make sure you do your homework before making an application to make sure you have the best chance of success – make sure your credit history is up to date and accurate, have good evidence of your financial situation and generally present a good case to the lender about why your application should be accepted.

Pay-as-you-go car finance on benefits

Pay-as-you-go car finance is a type of loan available to anyone having trouble getting credit – not just to those on benefits. It’s a type of Hire Purchase finance and it’s secured to the car, which means the car belongs to the lender until the loan is paid off.

Central to its premise is a telematics system, known as a black box fitted inside your car. It connects to the car’s internal computer and to the finance company remotely. If you don’t meet your payments, the finance company can disable your car and you won’t be able to start it.

A few days before your payment is due, a light on the box will flash to let the driver know. Once you’ve paid, you’ll get an activation code sent to your phone. Enter that into the box, it turns off the light and lets you carry on driving the car. If you don’t enter the code within 30 days, the car will be deactivated.

It’s worth noting that the deactivation won’t happen while you’re driving, only when the ignition is already off.