If you have a limited income, you might be wondering whether securing finance for a car is within reach.
The good news is that it is possible, but it requires careful planning, thorough research, and a realistic approach to affordability.
Understanding car finance and how it works
Car finance is a way of spreading the cost of a vehicle over a set period, rather than paying the full amount upfront. There are different types of agreements available, and choosing the right one depends on your financial situation and long-term goals.
- Hire Purchase (HP): This option involves an initial deposit followed by fixed monthly payments. Once the final instalment is made, you own the car outright. It can be a suitable choice if you plan to keep the car for several years and prefer predictable monthly costs.
- Personal Contract Purchase (PCP): Similar to HP, this involves monthly payments, but at the end of the term, you have the choice to return the car, trade it in for a new one, or make a lump sum payment to keep it. This option works well if you want flexibility and the opportunity to upgrade your vehicle.
- Personal Loan: If you have a good credit history, a personal loan from a bank or lender could be an alternative. The advantage is that you own the car immediately and can sell it if needed. However, the interest rate depends on your credit rating and the lender’s terms.
4 factors that affect your ability to secure car finance
Lenders consider various aspects when assessing your eligibility. If your income is lower, you may need to pay closer attention to these factors to improve your chances of approval.
- Credit history
A strong credit score can increase your likelihood of being accepted for finance at a reasonable rate. If your credit history is weak, some lenders may still approve finance but with higher interest rates.
- Employment status
Stable employment and a regular income give lenders confidence that you can keep up with repayments. If you are self-employed or work on a freelance basis, providing proof of consistent earnings may be necessary.
- Existing financial commitments
If you already have loans or other significant outgoings, lenders will factor these in to determine affordability. Too many financial obligations may make securing car finance more challenging.
- Deposit amount
A larger deposit can reduce the amount you need to borrow, making approval more likely. It also decreases the overall cost of the finance agreement.
How to improve your chances of getting car finance on a low income
If you are concerned about being accepted for finance, there are several steps you can take to strengthen your application.
Check and improve your credit score
Lenders use your credit score to assess risk, so reviewing your report before applying can be beneficial. If your score is lower than expected, taking steps to improve it can help, such as:
- Paying bills on time
- Clearing outstanding debts
- Ensuring your details are correct on the electoral register
- Avoiding multiple credit applications within a short space of time
- Keeping credit card balances low and managing existing credit accounts responsibly
Consider a more affordable vehicle
Opting for a less expensive car means lower monthly repayments, making approval more likely. A reliable used car can be a practical option if your budget is tight. While a brand-new car may seem appealing, pre-owned vehicles often provide excellent value at a reduced cost.
Save for a higher deposit
The more you can pay upfront, the lower the amount you need to borrow. This not only reduces the total cost of the loan but also improves your chances of being accepted. If possible, try to save at least 10-20% of the car’s value before applying for finance.
Explore lenders that specialise in low-income applicants
Some finance providers cater to those with limited income or a less-than-perfect credit history. These lenders may offer more flexible terms, though it’s essential to review the interest rates and repayment conditions carefully. Some dealerships also have financing options that accommodate different financial situations.
Alternatives to traditional car finance
If you find that mainstream finance options are not suitable, there are other ways to afford a car.
- Credit unions: These organisations often provide loans with lower interest rates compared to traditional banks and lenders. They are particularly helpful for individuals with lower incomes or those looking for ethical lending options.
- Guarantor loans: If you have a trusted family member or friend willing to co-sign your finance agreement, lenders may be more willing to approve your application. This is because the guarantor in a guarantor loan agrees to take responsibility for repayments if you are unable to meet them.
- Leasing schemes: Some companies offer budget-friendly leasing plans, which allow you to use a car without long-term ownership commitments. However, you must return the vehicle at the end of the lease period.
- Saving up: If you can wait a little longer, putting money aside gradually for a second-hand vehicle could be a cost-effective solution. Paying in full eliminates interest charges and long-term financial commitments.
- Government assistance schemes: Some local authorities and charities offer grants or financial aid for individuals who need a car for work, education, or essential travel but have limited resources.
The risks of securing car finance on a low income
While it is possible to get finance, it’s important to be aware of potential risks before making a commitment.
- Higher interest rates: If your credit score is lower or your income is limited, lenders may charge higher rates, increasing the overall cost. Always check the APR (Annual Percentage Rate) before agreeing to a deal.
- Risk of repossession: Missing payments can result in losing the car, which could affect your credit rating and ability to borrow in the future. Ensure that the repayments fit comfortably within your budget.
- Impact on monthly budget: A car finance agreement is a long-term commitment, so it’s essential to ensure repayments fit within your existing expenses without causing financial strain.
- Unexpected costs: Owning a car involves additional expenses such as insurance, fuel, maintenance, and repairs. Ensure you account for these costs when determining affordability.
Making an informed decision
Before signing any agreement, take time to review all options and ensure the payments are affordable. Comparing offers from different lenders and reading the terms carefully will help you avoid financial difficulties down the line.
If you are unsure whether car finance is the right choice for you, seeking advice from a financial expert or an independent advisor could provide additional clarity.
