While it can be more challenging, several lenders understand your situation and offer tailored solutions. In this article, we’ll explore whether benefits count as income for car finance and guide you through the process.
Understanding car finance on benefits
A common misconception is that individuals on benefits cannot get approved for car finance. However, many lenders, especially those specialising in bad credit and unique financial situations, do consider benefits as a valid form of income.
These lenders believe that everyone should have access to car finance, regardless of their source of income. To qualify for car finance on benefits, your total monthly income must meet certain thresholds.
Typically, lenders require a minimum monthly income of £1000 after taxes. This income can come from multiple sources, including benefits. The key is that your total income meets the lender’s requirements.
Types of benefits considered
Not all benefits are accepted as primary sources of income, but several key ones are. Lenders commonly accept the following benefits: Disability Living Allowance (DLA), Carer’s Allowance (CA), and Personal Independence Payment (PIP).
These benefits can be considered as your main source of income when applying for car finance. However, it’s important to note that some lenders may have specific criteria, so it’s always best to check directly with them.
In addition to primary benefits, you can include other forms of income to meet the necessary threshold. This can include secondary benefits or other financial support you may receive. Combining multiple sources can strengthen your application and improve your chances of approval.
Types of car finance available
Hire Purchase
Hire Purchase is a popular option for individuals on benefits. With HP, you make monthly payments until the loan is fully paid off, at which point you own the car. This structured repayment plan helps manage your budget effectively. However, the amount of benefits you receive can impact your maximum loan amount and the selection of cars available to you.
Personal Contract Purchase
Personal Contract Purchase offers flexibility at the end of the loan term. You can choose to return the car, purchase it, or start a new agreement. This type of finance tends to have stricter eligibility criteria and usually requires a higher level of creditworthiness.
Demonstrating financial stability through budgeting plans or additional income proof is crucial for approval.
Guarantor
Adding a guarantor to your application can significantly increase your chances of approval.
A guarantor is someone who agrees to take responsibility for your finance agreement if you default on payments. This added layer of security reassures lenders and can lead to more favourable loan terms and better car options.
The application process
- First, assess your income and ensure your total monthly income, including benefits, meets the lender’s requirements. Then, choose a lender that considers benefits as income. Specialist lenders are more likely to approve your application.
- Next, prepare your documentation, gathering proof of income, including benefit statements, to support your application. Submit your application accurately and provide all necessary documentation.
- Await the lender’s decision; they may request additional information if needed. If approved, review the finance agreement carefully before signing. Once the agreement is finalised, you can collect your new car and enjoy the freedom it brings.
Tips for successful approval
When applying for car finance, honesty is crucial. Provide accurate information about your income and financial situation. Lenders appreciate transparency and are more likely to work with you if they have a clear understanding of your circumstances.
Before committing to a finance agreement, ensure that the monthly payments fit within your budget. Overstretching yourself financially can lead to difficulties in making payments and negatively impact your credit score.
Don’t settle for the first offer you receive. Shop around and compare different lenders and finance options. This allows you to find the best deal that suits your needs and financial situation.
Avoiding pitfalls
Beware of guaranteed lenders. Some lenders claim to guarantee approval regardless of your credit score or financial situation. Be cautious of such claims as they often come with high interest rates and unfavourable terms.
Reputable lenders follow strict guidelines and cannot make such promises. Avoid finance brokers who charge high application fees. These fees are often non-refundable and can add unnecessary financial strain.
Look for lenders who offer free application processes. Making too many formal loan applications can negatively impact your credit score.
Each application leaves a mark on your credit report, and frequent applications may make you appear desperate for credit. Instead, focus on getting quotes and conducting soft searches that do not affect your credit rating.
Final thoughts
Securing car finance while on benefits is challenging but not impossible. By understanding the types of benefits accepted, the various finance options available, and following a clear application process, you can improve your chances of approval.
Remember to be honest, budget wisely, and shop around for the best deals. With the right approach, you can find a car finance solution that suits your needs and enjoy the mobility and freedom a car provides.
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