This article will delve into this topic, providing you with comprehensive information to help you make an informed decision.
Types of benefits considered for car finance
Lenders typically categorise benefits into those they consider stable and those they see as temporary or less reliable. Benefits like Disability Living Allowance, State Pension, and Personal Pension are often considered stable forms of income.
On the other hand, benefits such as Jobseeker’s Allowance and Maternity or Paternity Pay are viewed as temporary and may not be accepted by many lenders.
Deposit requirements: what to expect
The deposit required for car finance can vary significantly based on a range of factors, including your credit score, income level, and the type of benefits you receive.
Generally, individuals on benefits might face a higher deposit requirement. This is because lenders use the deposit as a form of security; a higher deposit reduces the lender’s risk.
For instance, if you have a stable benefit income and a good credit score, the deposit requirement might not be much higher than usual.
However, if your income from benefits is perceived as less stable, or if you have a poor credit history, the lender may ask for a higher deposit to mitigate their risk.
Factors affecting deposit amount
Several factors can influence the amount of deposit required for car finance when on benefits:
Credit score
Your credit score is a critical factor. A higher credit score can lead to a lower deposit requirement, while a lower score can result in a higher deposit.
Income stability
The stability of your income plays a significant role. Benefits considered stable and long-term might result in a lower deposit compared to temporary benefits.
Loan amount
The total amount you wish to borrow can also impact the deposit. Higher loan amounts typically require higher deposits.
Lender policies
Different lenders have varying policies regarding car finance for individuals on benefits. Some may have more lenient requirements, while others might be stricter.
Improving your chances of approval
There are several steps you can take to improve your chances of securing car finance with a reasonable deposit while on benefits:
- Improve Your Credit Score: Ensure that your credit score is as high as possible. Pay off any outstanding debts and avoid missing payments. Regularly check your credit report for errors and have them corrected.
- Provide Proof of Income: Be prepared to provide detailed proof of your benefit income. This can include bank statements, award letters, or other documentation. Lenders need to see that your income is consistent and sufficient to cover the car payments.
- Consider a Guarantor: Having a guarantor can significantly improve your chances of getting approved and might reduce the deposit requirement. A guarantor is someone who agrees to make the payments if you are unable to. This gives the lender added security.
- Shop Around: Different lenders have different policies. It’s essential to shop around and find a lender that offers favourable terms for individuals on benefits. Some lenders specialise in offering finance to people with non-traditional incomes.
- Save for a Larger Deposit: While this might seem counterintuitive if you’re concerned about high deposit requirements, saving a larger deposit can demonstrate financial responsibility and reduce the amount you need to borrow, making you a more attractive candidate to lenders.
- Prepare a Budget: Demonstrating a well-prepared budget can show lenders that you have considered the affordability of the car finance and are prepared to manage your finances responsibly.
The role of specialist lenders
In the car finance market, there are specialist lenders who cater specifically to individuals with non-traditional income sources, including those on benefits.
These lenders understand the nuances of benefit income and are more flexible in their lending criteria. While they might still require a higher deposit compared to traditional lenders, their terms can be more accommodating.
Final notes
Securing car finance on benefits is entirely possible, but it often comes with higher deposit requirements and other considerations.
By understanding the factors that influence these requirements and taking steps to improve your financial standing, you can increase your chances of obtaining car finance under favourable terms.
