Can I get car finance if I'm on benefits?

Receiving benefits shouldn't stop you getting car finance; but there are some important facts to think about

John Evans
Jun 25, 2019

Being on benefits shouldn't be a barrier to mobility. Your reasons for needing a car are the same as anyone else’s and, depending on your circumstances potentially greater, so don't be discouraged from applying. It is worth being realistic about what you can afford to borrow, however.

We explain how you can get finance while on benefits and flag up warnings about those lenders who may try to exploit your situation.

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Isn't being in receipt of benefits a red light to lenders?

It depends on the lender and the type of customer they’re trying to attract. Some lenders, especially high street banks, prefer to lend to higher income groups or may have a credit scoring system (the system lenders use to work out how much you can borrow) that penalises the slightest blemish on an applicant’s financial history.

On the other hand, there are specialist lenders who actively seek to lend to those who might be regarded as higher risk customers with low credit scores. Of course, somebody on benefits need not necessarily have a low credit score. Receiving benefits may follow a sustained period of strong finances and responsible borrowing. This record will stand them in good stead when applying for a loan, which is why they should also approach traditional high street lenders.

Also, the credit reference agencies, who provide much of the information that lenders rely on when deciding whether or not to lend money, don't have the complete picture of a borrower’s finances. For example, they don't hold information on an applicant’s income and outgoings or details of their employment or other work.

Instead, the lender must get this information directly from the borrower when they do an affordability check with them when they apply for a loan. This is the borrower’s chance to present a realistic and responsible picture of themselves and their finances that may help strengthen their case and address any negatives in a credit reference agency’s report.

Is a loan to someone on benefits different from one to someone who is not?

In short, no. It still involves a sum of money that must be repaid, with interest added, over an agreed period. However, the sum that somebody on benefits can borrow and the interest they pay may be different. This is because they may have a limited income and other pressures on their finances that restrict their borrowing capacity and which, at worst, could mean them missing an instalment.

Repayments are how lenders get their money back, so people who have a history of missing these are likely to be seen as a high risk to lenders. The lender has to protect themselves against the likelihood of borrowers missing payments - and the higher risk they see a person the more interest they're likely to charge them - although borrowers should be wary that some lenders exploiting this, charging high interest rates to low-risk customers.

What should I be wary of when applying for a loan on benefits?

In addition to lenders taking advantage of your circumstances, be wary of:

Lenders who discriminate on the basis of your physical or mental condition

This is illegal, so if you’re receiving benefits related to these conditions, watch for them being given as excuses for refusing to lend to you or increasing the cost of your loan.

High interest rates

The Money Advice Service warns people against borrowing from lenders whose names come up prominently when you search online for ‘loans for people on benefits’ or ‘loans for disabled people’. It says that while you may be expecting an interest rate of around 10-20%, the APR or the actual rate that you pay with some of these less honourable companies may be 500% or even 4000%. This could potentially add thousands to the total amount you pay.

Low or 0% interest rates

By the same token, be wary of loans where you appear to be paying a very low interest rate or even no interest at all on a used car since, if you're getting the finance through a car dealer, the high cost of the loan will have been bundled into the cost of the car itself. This makes it very hard to work out whether you're getting a good deal.

Lenders who ‘guarantee’ to lend you money

They cannot do this since they would be ignoring your credit score. The 2010 Consumer Credit Act states that making false or misleading claims in relation to consumer finance is an offence. If they turn a blind eye to this, walk away since they may also be reckless in other ways.

Application fees

Avoid online finance brokers who charge an application fee. It’s sometimes as high as £300 and although they may tell you it’s refundable, in reality they may make it difficult for you to get your money back.

Making too many loan applications

Don't make too many loan applications because they reflect badly on your credit score, since regular applications make it look as if you are borrowing beyond your means to a credit reference agency.

Pay-as-you-go car finance on benefits

Pay-as-you-go car finance is a form of loan available not only to people on benefits but also to anyone who is struggling to get credit. It’s based on a straightforward hire purchase (HP) loan secured on the car, which means the vehicle remains the property of the lender until the loan is fully paid off.

Where it differs from most HP loans is in the discreet fitment of a small black box inside the car. This connects to the car’s internal computer and communicates with the finance company via a GPS link.

Around three days before the monthly repayment is due, a light on the box flashes to alert the driver. Once payment has been made, an activation code is sent to the driver’s phone which, when entered into the box, turns off the light and allows you to continue driving the car.

Failure to enter the code within 30 days will cause the current activation code to expire and the car to be deactivated, meaning you can no longer drive it.

A final piece of advice

Some lenders will be looking to take advantage of your situation, so temper your enthusiasm for that loan and have your guard up. Simply, if a loan seems too good to be true, it probably is. Remember, too, how much you're happy borrowing and don't let anyone persuade you to commit to more than you think you can pay back.

        
                      

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