Getting a car loan when you're self employed

1. Decide on the type of loan you need

While you will often hear ‘car loan’ used as an umbrella term, there are various types of car financing options available depending on your specific needs and circumstances. You’ll want to consider which of the following variety of loans is best suited to your situation

Consumer loan

A consumer loan is a car loan in the most conventional sense. The vehicle is to be used primarily for personal use, and you will need to provide several forms of documentation to verify your identity, income, expenses and debt. Since most car loans are secured against the vehicle, the lender has the right to repossess the car, if you fall behind or default on your payments.

Low doc loan

A low doc car loan is a variation of the consumer loan that can help self-employed people who don’t receive a regular income and are struggling with meeting the application requirements. As the name implies, low doc loans don’t require as much paperwork as standard car loans, particularly useful for self-employed people who don’t have traditional means like payslips to demonstrate their income. Lenders may still ask for details about your business and the associated income, which might include bank statements and tax returns, and an accountant’s letter confirming your ability to make the repayments.

Since low doc loans provide less comprehensive financial information to lenders, they are viewed as riskier, and therefore tend to attract higher interest rates. Only certain lenders offer low doc loans in Australia.

Business car loan

Before you straight away start looking at consumer car loans, you first might want to consider if a business car loan is actually more suitable. If the vehicle will predominantly be used for business purposes(whether you are buying an ice cream van or are a tradesman who does most of your driving to and from jobs), you could consider several types of business loans that could also be suitable. A chattel mortgage is the business version of a consumer loan. It functions in much the same way: the lender will provide the funds for the vehicle, you take ownership once this purchase is complete, then the vehicle acts as security for the loan. The main differences are of course that the car must be used primarily for business purposes, while the interest you pay may be tax deductible.

Alternatively, you might pursue a commercial hire purchase. This means that the lender purchases the vehicle then hires it back to you over the loan period. You make repayments in much the same way, then once the vehicle price and total interest have been paid, you take ownership of the car. Again, these types of loans are not offered by all lenders, so it is important to do your research before finalising your decision about which type of loan is best for your personal circumstances.

When you are deciding on the most appropriate loan for your circumstances, you can’t be too thorough in your research. More unorthodox loans like commercial hire purchases or low doc loans are only available at select providers, so you’ll want to make sure you explore all these options as well before picking the loan for you

2. Find the loan product that best suits you

After you have decided on the type of loan, the next step is to compare loans. As with any financial product, you’ll want to thoroughly explore the market. As a self-employed applicant for car finance, you’ll want to pay close attention to the following:

Interest rates

As with any loan product, the interest rate you will pay is normally the most significant factor in determining the overall cost of the loan.

When you’re self-employed, most lenders will require you to provide at least 2 years worth of tax returns sufficient to demonstrate if you are able to service a loan or not. However, if the nature of your self-employment means you are not able to provide conventional proof of income, a low doc loan may allow you to use alternative means to demonstrate your ability to pay off your loan. However, this also tends to be associated with higher interest rates, since the lender has less of an understanding of your financial position, so you become a riskier prospect in their eyes.

Restrictions

You’ll want to make sure your lender does not have restrictions that could impact self-employed borrowers. Many lenders may not provide a car loan for a self-employed applicant if the ABN of the business has been registered for less than one year, for example. You might also be limited to a shorter loan term, or a lower maximum amount.

Loan repayment options

Some loans are flexible when it comes to making additional payments to pay off your loan. If you are self-employed, your income might be more erratic than receiving a regular pay check. In this case, you might want to be able to make overpayments when you have surplus capital (just received payment for a big job, for example) to cover yourself for the slower months when your business isn’t generating as much cash flow. If this is the case, it’s important to select a loan product that allows for this flexibility.

3. Submit your application

When you apply for a car loan, the lender will make an assessment of your ability to repay the loan. They will look at your monthly expenditure, outstanding debt obligations and your income. If you’re an employee, proving your income is straightforward as you can provide copies of your last few payslips. However, as a self-employed applicant, you will need to provide alternative evidence of your income. This generally includes tax returns for the previous two financial years or financial statements. Lenders might ask for additional information on top of these to completely verify that your income is what you say it is. If you are unable to service on a regular car loan as a self-employed applicant, you may wish to consider going down the low doc loan pathway to achieve your goal.

4. Tips for approval

There are several steps you can take that can improve your chances of getting a loan when you are self-employed.

Improve your credit score

Lenders will assess the credit score of any applicant, regardless of their employment status. If you are self-employed, a good credit score is a great way to show your lender that despite your irregular income, you are capable of repaying your debts.

Consider a secured loan

If you already own an expensive asset, such as real estate, many lenders, including loans.com.au, offer equity releases on your existing home, which can be a useful tool depending on your financial situation, allowing you to purchase a new car.

Keep your business records organized

If you keep your business records up to date and organized, you can make it easier to gather proof of your income when it comes to apply for the loan.

If you’re in the market for a car loan, loans.com.au offers some of the most competitive rates on the market. If you’re self employed, and wondering whether you’ll need to jump through any extra hoops to prove your ability to repay the loan, you can speak to one of our lending specialists, who will be able to walk you through the process.

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