Many people receiving benefits, including universal credit, are able to finance a car through various schemes, provided they meet the necessary criteria. If you’re thinking about applying for car finance while on universal credit, understanding the process and knowing your options can help you make an informed decision.
What is universal credit?
Universal credit is a payment from the government to help people with their living costs. It’s designed for those who are out of work or on a low income and replaces several older benefits such as jobseeker’s allowance and income support. The amount you receive depends on your individual circumstances, including your income, savings, and whether you have children or other dependants.
Since universal credit is means-tested, it is calculated based on your earnings and other financial resources. As a result, it can sometimes seem like the government sees you as a higher risk for lending money. However, this doesn’t necessarily mean you can’t secure car finance.
Can you get car finance while on universal credit?
Yes, you can. Lenders consider a range of factors when deciding whether to approve your car finance application. While being on universal credit might raise concerns for some lenders, it doesn’t automatically disqualify you from securing car finance. Your chances will depend on several other factors.
What factors influence your ability to get car finance on universal credit?
Your credit score
Lenders typically check your credit score to assess how reliable you are in paying back loans. A good credit score can significantly increase your chances of getting approved, even if you’re on universal credit. If your credit score is low, however, you might face higher interest rates or difficulty securing finance.
Income level
While you may receive universal credit, lenders will want to understand how much income you have in total. If you receive additional income, such as from a partner or part-time work, this can help improve your chances of approval. Be prepared to show proof of income, including your universal credit payments.
Employment status
Lenders will consider whether you’re employed or self-employed, even if you receive universal credit. Stable employment can reassure lenders that you’ll be able to make your repayments.
What types of car finance are available for people on universal credit?
When looking for car finance on universal credit, you’ll generally have access to a few different options. Each type has its pros and cons, so it’s important to understand what’s available before making a decision.
1. Hire purchase (HP)
Hire purchase is one of the most common types of car finance. With this option, you pay an upfront deposit and then spread the cost of the car over a set period, usually between one to five years. Once you’ve made all the payments, the car is yours.
The advantage of hire purchase is that it’s relatively straightforward and doesn’t usually require a high credit score. However, your ability to secure HP finance will depend on your ability to meet the monthly payments, which is assessed based on your income and credit history.
2. Personal contract purchase (PCP)
Personal contract purchase is another popular choice for people on universal credit. With PCP, you make lower monthly payments compared to HP, but at the end of the term, you’ll have the option to either pay a large balloon payment to buy the car outright or return the car and walk away.
This option is often attractive to those who want to drive a newer car and have lower monthly payments. However, it can be harder to get approved for PCP finance, especially if you don’t have a strong credit history or sufficient income.
3. Personal loans
Some people choose to take out a personal loan to buy a car. If you have a good credit score and stable income, this might be a viable option. You can use the loan to buy the car outright and own it from the start. However, personal loans can sometimes come with higher interest rates, and qualifying for one while on universal credit can be tricky. Lenders might require you to show you have a steady income to prove you can afford the repayments.
4. Guarantor loans
A guarantor loan is a form of car finance where a friend or family member agrees to cover the repayments if you fail to do so. If you’re struggling to secure car finance on your own, this option could increase your chances. The guarantor’s credit score and financial situation will be taken into account, so it’s important that they’re willing and able to take on this responsibility.
In summary
Securing car finance while on universal credit is certainly possible, but it requires careful consideration and planning. The key factors that influence your approval will include your credit score, income, employment status, and deposit.
By understanding your options and preparing properly, you can increase your chances of finding a car finance deal that suits your needs and budget. Always compare different options and ensure you can comfortably meet the monthly repayments before committing to any agreement.
