For people who are self-employed or have bad credit rating, you may believe that they can’t qualify for car financing or car loans at all. The good news is that although it may be difficult, it is not entirely impossible to get car finance if you are self-employed or have bad credit.

We at Carmudi frequently get questions about car financing, so we thought it best to provide some solid answers for those who are struggling to secure financing for their next car purchase.

Car financing for the self-employed

The biggest hurdle to obtaining car financing when you’re self-employed is to prove income. Lenders will likely ask to see this proof on paper before approving car loan applicants, and failure to produce such a document is the cause of many self-employed individual’s car financing woes. Thankfully, all is not lost. The first thing you have to do is answer four pertinent questions:

Will you be using the vehicle mainly for business purposes?

If you intend to use the car for business, you need to have an Audited Financial Statement. Most lenders require you to have one for the last two years, but there are those who are satisfied with just your latest AFS. If you haven’t applied for an AFS yet, you better do so before applying for any type of car finance.

Have you filed a tax return?

Self-employed individuals rarely lodge tax returns. A tax return is an absolute necessity for many lenders, but not all. Likewise, certain lenders may ask for tax return substitutes to verify income in case a loan applicant can’t furnish one, such as bank statements, monthly receipts, etc.

These documents will be used to assess your monthly income, and if your lender confirms that you have enough, you’ll have a good chance of getting approved for that car loan without submitting a tax return.

Can you leverage your finances?

If you have a sizeable asset, you can use that to manage a larger down payment. Most lenders set the down payment at 20 percent, but if you can get it to as high as 50 percent, you improve your chances of getting approved for a car loan while self-employed.

Likewise, if you are currently paying off a mortgage and are managing to do so without missing a payment, then that shows your potential lender that you are relatively stable and a good payer, thereby improving your chances of getting your car loan approved.

Financing a car with bad credit

Are you comfortable divulging personal financial information?

You can expect your lender to act like a police detective who wants to uncover any reason they can find to disapprove your loan, so anything you say or declare, they’re going to find ways to confirm it. Don’t lie about the state of your income or finances.

If your lender discovers the truth, they might think you’re defrauding them, and you could find yourself in deep trouble. Be accurate with your statements, and if you prefer to protect your privacy, limit the information you provide only to what is asked for.

Car finance for people with bad credit

Car loans exist for people with bad credit, but it comes with a huge downside: a significantly larger interest rate. Thus, when shopping for an auto loan with bad credit, you need to make sure you’re not overcharged, and the first critical step in doing so is to check your credit score. There are two reasons why you need to do this:

  • To confirm the accuracy of your credit score. At times, all that it takes to raise a credit score to a comfortable level is to find and correct mistakes. Ideally, you should give yourself thirty days after correcting any credit score mistakes before you begin shopping for a car loan.

  • To see which factors are impacting your credit score the most. If you have multiple types of credit in use, such as credit cards, installment loans, mortgages, and more, then you may be able to identify which areas of your finances need help the most. You may then take certain steps to improve your credit standing, and in so doing, make your lender believe that you are worthy of a loan approval.

Shop around

The key to bad credit car loan success is to shop around exhaustively. There are definitely a lot of lenders that offer car loans for people with bad to no credit, so you need to be patient with your selection.

If you must, you can work with a broker who can help you find the best rates for your situation. Though the broker’s service fees add to your expenditures, your long-term savings can make the larger car loan upfront cost worthwhile.

More ways to save on auto loans

To make the most out of a bad financial situation, here are things that you can do to save money on your car loan:

Choose the loan with the shortest term that works for you. A shorter loan term carries a lower interest rate than a longer one. By paying off the loan faster, you’ll be able to save more money.

Buy a brand new vehicle

Used car loans are inherently more expensive than new car loans. That said, if you can find a good deal on a used car, then go for it. Even with a higher interest rate, it’s still very much possible for you to save, especially if the difference between the used car price and the brand new price is significant.

Avoid the extras

The sales representative will probably try to entice you with extras that don’t really serve any good purpose except to add a few pesos to his pocket. Over time, these added expenses can add up, so unless utterly necessary, it’s best to avoid these extras altogether and go home with just the car. Being self-employed is challenging, but having a poor credit score can make your situation even worse.

That said, running your own business or having a bad credit rating doesn’t always mean you are a bad investment to a bank. Talk to a financial adviser to discuss your situation so you can understand where to start and what to do to get the car loan you deserve.