Car finance if you're unemployed

Car finance if you're unemployed
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Car finance if you’re unemployed

It’s more difficult to get car finance if you don’t have a job, but it’s not impossible – as long as you’re well prepared.

Being without a car and without a job is a tricky situation. You may feel you need a job to get a car, and you need a car to be able to get to a job.

There’s no two ways about it – it’s very difficult to get the best car finance deals when you’re unemployed. But it’s not impossible if you can meet certain conditions, avoid potential debt traps and have a clear financial plan.


Can I get car finance if I don’t have a job?

We’ll say this up front – if you’re unemployed, you may not be able to get any kind of loan or car finance at all. It’s a difficult situation. However, if you’re able to tick certain boxes in the eyes of lenders they may consider your application – although they may still reject it. If you’re unemployed but receiving benefits, or have a good employment record but are between jobs, or if you’re retired and receiving a pension, and if you have a good credit rating, car finance could still be an option.

You’ll need to be able to prove to a lender that you have enough income after your regular expenses to make car finance repayments. The maximum you’re likely to be approved for will equal repayments of 25% of your net income – that’s the starting point when working out if you’ll be able to borrow enough to get a car.


How do I get a car loan if I’m unemployed?

To improve your chances of getting a car loan even though you’re unemployed, there are several steps you can take. These will all improve your standing in the eyes of potential lenders – they’re assessing you for risk, to make sure you can pay back any money you borrow, so anything you can to prove your credibility will help.

Make sure you’re registered to vote on the electoral roll and that your details are up to date. This counts as proof of your address and lets lenders confirm you are who you say you are, and live where you say you live. You can register at your local Electoral Register Office if you live in England, Scotland or Wales, or if you’re in Northern Ireland then at the Electoral Office for Northern Ireland.


Check your credit record

Everyone builds up a credit rating over time, from when you first open a bank account, take out a mobile phone contract or subscribe to Netflix. This history is kept track of by credit reference agencies.

When you apply for a car loan, the lender will look at your credit history, along with other things like where you live, where you work and how much you earn, and decide if you’re a good candidate for the loan.

You have a right to see your credit history, and can check it for free on websites like ClearScore, Credit Karma, Moneysupermarket's Credit Monitor, or Money Saving Expert's Credit Club, or direct from the three credit reference agencies – Experian, Equifax and Transunion. And it’s important to check it, because mistakes can happen. Errors in your history can lower your credit score and make it harder to get a loan. If you find any errors in your history, tell the credit reference agency and they’ll look into it. If they confirm that there’s a mistake, they’ll correct it.


Be wary of too many loan applications

If you have any outstanding loans, settle them if you can – this will boost your chances of being accepted for another.

When it comes to loan applications, less is more. Making multiple loan applications will make lenders think you’re taking out multiple loans, even if you’re only looking for a willing lender. Make sure any quotes you get are using soft credit searches, which won’t affect your rating.


Consider a guarantor

If your credit rating or circumstances mean you’ll struggle to get approved for finance, you could consider enlisting the help of a guarantor and getting a joint loan. This is someone with a good credit score and a stable income that will continue making payments on your behalf if you can’t. Their commitment will give the lender confidence that they’ll get their money back and boost your chances of a loan approval.

The guarantor must understand that if you stop paying, the responsibility passes to them.


What car finance options are available to me if I’m unemployed?

As well as a straightforward loan, you might be considering a Personal Contract Purchase (PCP) or hire purchase (HP) finance agreement. Make sure the lender is registered with the Financial Conduct Authority (FCA), which makes sure companies lend responsibly.

PCP deals are generally only available on new or nearly new cars, and therefore tend to have high monthly payments, even if they’re more affordable than comparable HP deals. HP finance is available on considerably older cars, which could lower your monthly repayments and make you more likely to be approved if your income is limited because of unemployment.

With both PCP and HP you could lower your monthly repayments still by agreeing to a longer contract length. This will spread the cost over more manageable payments, although you’ll end up paying more overall in extra interest.


Other loan types

You could also consider a secured loan, which is linked to an asset you already own, such as another car or a house. The terms will state that if you fail to repay your loan, your asset could be seized, which lowers the risk for the lender but raises the risk for you.

You’ll need to already have a sufficiently valuable position to use as security and understand that it could be repossessed if you can’t keep up with repayments.

A high-interest unsecured personal loan is another option. It’s similar to conventional unsecured loans, but with a high interest rate to reflect your unemployed circumstances and the higher risk to the lender. You’ll have to pay more to borrow the money you want, and the maximum amount you can borrow will be smaller. Compare interest rates and APR figures across different lenders to make sure you don’t pay more than you need to and don’t make the application until you’ve found a competitive rate.

It’s always worth taking financial advice from an expert before entering into these kinds of loans, because they can have significant long-term consequences.


Lenders to avoid

A responsible lender will explain every step of the lending process to you, and you’ll be given paperwork to reinforce that. They won’t give you a loan if they think you won’t be able to repay it. But not all lenders are responsible, and some will try to exploit those on a lower income or in unemployment.

Never accept a loan from an unregulated lender, otherwise known as a loan shark. These people or companies charge very high interest rates and offer no legal protection. Many have a reputation for threatening people who fail to make their repayments. You rarely get a credit agreement or contract, you may have to hand over things like your passport, driving licence or bank cars as security, and the interest rates could be raised at any time. In short, stay away from them.

You might come across lenders advertising a guaranteed car loan. This is illegal – no lender can guarantee a loan without investigating the customer’s circumstances and their ability to repay. They may charge you to make an application knowing that you’ll probably be refused, and if you’re accepted the interest rates are likely to be very high. Once again, avoid dealing with them.

Payday lending is increasingly common. It’s a concept originally designed to tide people over until their next paycheck, but it’s now available over longer terms, too. Most payday loans are for small amounts of money, but the interest rates can be huge – as much as 1500% APR. As a result, this is an extremely expensive way of financing a new car, and could easily lead to a spiral of debt. 

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