You’ve likely wondered whether you can apply for Hire Purchase (HP) car finance as a self-employed individual.
The good news is, yes, you absolutely can! However, there are a few things to bear in mind. In this article, we’ll dive into how HP car finance works for self-employed individuals, what lenders typically look for, and how you can best prepare to secure your car finance deal.
What is HP car finance?
HP (Hire Purchase) car finance is one of the most popular ways to finance a vehicle. Essentially, you pay a deposit upfront, followed by monthly instalments over a fixed period, typically between one to five years.
The key difference with HP is that you don’t own the car until you’ve made the final payment. The finance provider owns the vehicle throughout the term, but once all payments are made, it’s yours.
🚗 Read more: What happens at the end of a HP finance agreement?
Self-employment and car finance: Can you apply?
Absolutely! Just because you’re self-employed doesn’t mean you’re excluded from applying for HP car finance. While employed individuals often have the luxury of presenting their monthly payslips as proof of income, self-employed applicants need to approach the application process a bit differently. That’s not to say it’s more difficult—it just requires more documentation and preparation.
Here’s what to expect and how to strengthen your self-employed car finance application.
What do lenders look for?
When assessing any application for HP finance, lenders are primarily concerned with one thing: your ability to make regular, reliable payments. They will need evidence that you can afford the monthly instalments and that your financial situation is stable. Here’s a breakdown of what lenders usually evaluate:
Proof of income
This is where being self-employed can make the process a little more involved. Instead of payslips, lenders will typically ask for:
- Tax returns (SA302 forms): These are provided by HMRC and give a summary of your income over the last year or several years. The more evidence you can provide, the better.
- Bank statements: Lenders may request several months’ worth of bank statements to see the regularity of your income and ensure that it matches the figures in your tax returns.
- Accounts from an accountant: If you have an accountant managing your finances, having them prepare official accounts can help verify your income. Some lenders may even require this, depending on how long you’ve been self-employed.
Length of time in business
How long you’ve been self-employed can influence your chances of securing HP finance. Lenders often feel more comfortable if you’ve been running your business for a minimum of two years. This gives them confidence that your income is stable and that you’ve established yourself.
However, if you’ve been self-employed for less than two years, don’t worry—some lenders may still consider your application, particularly if you can show evidence of a steady income stream and provide additional documentation like future contracts or proof of ongoing work.
Credit history
Your credit score will play a significant role in whether you’re approved for HP car finance. Self-employed individuals are subject to the same credit checks as anyone else. A higher credit score demonstrates that you’re responsible with credit and can make payments on time.
If your credit score is on the lower side, you may still be approved, but you could face higher interest rates or be required to put down a larger deposit. It’s a good idea to check your credit report before applying and, if necessary, take steps to improve your score.
Steps to improve your chances of approval
If you’re self-employed and considering HP car finance, there are some proactive steps you can take to improve your chances of securing the best possible deal.
Keep your financial records in order
As a self-employed individual, the more organised and thorough you are with your financial records, the easier it will be to prove your income. Make sure your tax returns, bank statements, and accounts are up to date and accurate. If possible, have a qualified accountant help you prepare your records—this can add credibility to your application.
Offer a larger deposit
While many HP finance deals require only a small deposit, offering a larger one can work in your favour. A bigger deposit reduces the lender’s risk and may make them more likely to approve your application, even if your credit score isn’t perfect or if your income fluctuates.
Pay off existing debts
The less debt you have, the better your chances of being approved for HP car finance. Before applying, try to pay down any existing loans or credit cards. This will improve your debt-to-income ratio, making you a more attractive candidate to lenders.
Improve your credit score
If your credit score is lower than you’d like, there are steps you can take to improve it before applying for HP car finance. Pay your bills on time, reduce outstanding debts, and avoid applying for too many lines of credit at once. Even small improvements in your credit score can make a big difference when it comes to securing finance.
Benefits of HP car finance for self-employed individuals
For self-employed individuals, HP car finance offers several benefits that make it an attractive option:
- Fixed monthly payments: HP agreements offer predictable monthly payments, allowing you to budget effectively without worrying about fluctuating costs.
- Ownership at the end of the term: Unlike some other finance options, with HP, you will own the car outright once the final payment is made.
- Flexible terms: Many HP agreements allow you to choose the length of your term, typically ranging from one to five years, giving you control over your monthly payments and total costs.
- Potential tax benefits: If you use the vehicle for business purposes, you may be able to claim tax deductions on your HP payments. Be sure to speak with an accountant about what deductions you may be eligible for.
Other car finance options to consider
While HP car finance is popular, it’s not the only option for self-employed individuals. Here are a few alternatives to consider:
Personal Contract Purchase (PCP)
PCP is another form of car finance where you make monthly payments, but instead of owning the car at the end of the term, you have the option to either return the car, pay a lump sum to purchase it, or exchange it for a new model. This can be a good option if you like to change cars frequently.
Business car leasing
If you use your car primarily for business purposes, you might want to consider leasing instead of buying. Leasing allows you to drive a new vehicle without the commitment of ownership, and your monthly payments are often lower than HP. However, you’ll never own the vehicle, and there may be mileage restrictions.
Conclusion
As a self-employed individual, you can absolutely apply for HP car finance, but it’s essential to be prepared. Lenders will look closely at your proof of income, credit history, and length of time in business.
By keeping your financial records in order, offering a larger deposit, and improving your credit score where necessary, you can boost your chances of approval and secure a deal that works for you.
HP car finance offers flexibility, predictable payments, and eventual ownership, making it a great option for many self-employed people. However, be sure to consider other finance options if you’re looking for something more tailored to your specific needs.
🚗 You might like this guide: Can I apply for HP car finance if I am not a UK resident?