Can I get car finance if I'm unemployed?

It’s tough if you’re out of work and have no car to get around in. You may well be unable to get to work without having a car, but could be unable to pay for one without having a job. It’s a Catch 22 situation. So can you get car finance if you're unemployed?

If you have no fixed income and no job, it will be almost impossible to get a loan from a building society or high street bank. So what are your options? A small loan from friends and family? It’s a possibility - but borrowing from friends and loved ones can put a strain on personal relationships.

Fortunately, although conventional bank loans are effectively unavailable to the unemployed as an option, if you meet certain conditions you might actually be able to take out car finance - although it will be harder and more expensive than for someone in employment with a good credit rating.

Keep reading to discover what loans you might be able to secure if you’re unemployed, how to improve your chances of getting car finance when unemployed and which lenders to go for.

Car finance when unemployed

You might be able to secure car finance if you’re unemployed but receiving benefits, though it’s worth noting that some lenders will no longer accept Jobseeker’s Allowance. Similarly, if you have an otherwise good employment record but are between jobs, car finance could be an option.

If you are retired and have an income such as a pension, in combination with a good credit record, you could be able to get a loan. 

Like all people who apply for a loan, you will need to prove that you have enough income after your expenses to support paying off the car finance.

The maximum monthly payment you're ever likely to have approved is 25% of your net income, so use that as a starting point to see whether there's the possibility of getting sufficient finance approved to purchase a car.

How do I get a car loan?

Here are some simple steps you can take to improve your chances of getting that car loan you're after.

Firstly, make sure you’re on the electoral roll - meaning you're registered to vote - since this is proof of your address and enables lenders to confirm your identity.

Make sure your credit record is in good shape. Usde the likes of ClearScore or Credit Karma which give you access to your credit file, enabling you to check it for errors. Should you see anything inaccurate, notify the reference agency and if they agree with what you've claimed, they must amend it.

Settle any outstanding loans if you can to boost your chances.

Avoid making multiple formal loan applications because doing so makes lenders think you are taking out multiple loans, rather than simply trying to find a willing lender. Ensure any quotes you're getting are using soft credit searches to stop this happening.

Enlist the support of a guarantor. That is, a person with a good credit score who will continue making payments on your behalf if you’re unable to. They will give the lender confidence that the loan will be paid, making them more likely to approve you.

Apply for a joint loan. You and the other person - who must be in a better financial position for this to work - can jointly apply for a loan.

However, like a guarantor, the partner must understand that responsibility for making payments will fall on them if you stop paying. They should also understand that if you have a poor credit record, it could affect their own credit rating and their ability to borrow money in the future.

What car finance options are available to unemployed people?

There are two major types of loan - PCP and HP - but whichever you choose, make sure the lender is registered with the Financial Conduct Authority (FCA), the authority that makes sure companies abide by ethical standards and lend responsibly.

Such lenders should make no false promises, should make sure you really can afford the loan and should be transparent in their dealings with you.

Make sure the loan has a fixed rate of interest, meaning the interest rate cannot be altered during the loan period. This will enable you to budget, knowing your loan repayments won't change. When comparing the cost of borrowing from different providers, use the APR figure to do this, as this includes not only interest charges, but any other fees, too.

However, do bear in mind that some PCP finance and Hire Purchase deals include deposit contribution discounts, which typically aren't accounted for in the APR figure.

The best way to compare these with other offers is to get like-for-like quotes (with the same contract length, deposit amount and mileage allowance) and then you should be able to directly compare the monthly payments and overall cost.

If you need to get the lowest monthly payments, consider a longer contract length, as this means the cost of the car is spread across more payments. Be aware, however, that doing this means you'll pay more interest overall, as you're borrowing the money for a longer period of time.

Secured loans

A secured loan is linked to an asset such as a car or a house that can be seized should you fail to make payments on the loan. For this reason, it’s less risky for the lender, making them more likely to approve you.

Remember, though, that it also means you need to have a sufficiently valuable possession to offer as security against the loan and understand that this may be repossessed if you fail to keep up payments.

High-interest unsecured personal loans

These are much like any unsecured personal loan except that they come with a higher interest rate to reflect your circumstances and the potentially higher likelihood of you failing to make payments.

Due to this higher risk, you'll have to pay more to borrow the money you want and the maximum loan amount you can borrow will be smaller. Check interest rates and APR figures across different providers to be sure you’re not paying more than you need to and don't make an application until you’re sure the rate is competitive.

Lenders to avoid or watch out for

Not all lenders have your best interests at heart, so you should be wary of those who would try to exploit your position to take advantage and put you at risk of losing money or worse.

When you have a lower income or are not working, traditional finance from banks or building societies is unlikely to be available. However, as a result, some less trustworthy individuals and companies may try to encourage you to borrow from them.

Loan sharks

If you're unemployed, it's never wise to accept a loan from an unregulated lender. Also known as loan sharks, these people or companies offer no legal protection and charge very high interest rates - meaning the amount you pay back is likely to be far greater than the amount you borrowed.

Loan sharks have a reputation for threatening people if they get behind with payments or may pressure you to borrow more money to pay back your existing debt.

Loan sharks rarely give you a credit agreement or supporting paperwork, may take items such as your passport, driving licence and bank cards as security, could refuse to disclose interest rates and can raise their interest rate at any time. Consequently, it's best to avoid dealing with them at all.

Lenders advertising guaranteed car loans

It is illegal to guarantee the promise of a car loan, since no lender can do this without researching the borrower’s circumstances and ability to repay the loan.

Some companies advertising guaranteed car loans may even charge you to make an application, knowing you are likely to be refused. If you are accepted they will charge high interest rates. Again, it's best to avoid dealing with companies that make such claims.

Payday lenders

Originally intended to tide people over until payday, this form of lending is now commonly extended to longer terms. It’s generally for small amounts of money but even though the interest rates are capped by law, they can still be high - as much as 1500% APR over a year.

As a result, using a payday loan to fund a car can be a very expensive way to access a new set of wheels. The very high interest charges could also lead to a spiral of debt, where it becomes even harder to pay off the balance. If you miss a repayment, you may be offered a further loan and very quickly you could find yourself in even more debt.