Entrepreneurs, business owners and self-employed people may find themselves with limited options when it comes to accessing finance. Even if you're in a good financial situation, a lender may see you as a risk if you don't receive a regular income. If you would find it hard to prove stable income over the last two years and are looking for a loan to finance a vehicle, a low doc car loan might be an option for you.
How do low doc car loans actually work?
Low doc car loans involve the lender approving a loan using less documentation than is normally required. These loans are considered risky because it is harder for the lender to prove if you are in an unstable financial situation. Lenders who offer these loans will generally charge higher rates and fees to offset the risk they take on by lending to you.
These type of loans are generally suited to those who don’t earn a regular income; this includes freelancers; those who get paid in cash; the self-employed; and contractors. Lenders offer low doc car loans for personal and business use, and some lenders may offer loans for cars that will be used for both. This may be good for self-employed people who use their car as their business vehicle and personal vehicle.
How you can compare low doc car loans
Low doc car loans have several features which should be taken into consideration when choosing a car loan. Here are some points to keep in mind when comparing your options:
- What are fees associated with your loan? You should check the upfront fees you will have to pay for the lender to set up the loan, as well as any ongoing fees. Also check to see if you will be charged for any features of the loan, such as making additional repayments.
- What is the interest rate attached to your loan? Low doc loans tend to have higher rates, so make sure you compare your options to ensure you get the best deal. Check if the rate is fixed or variable and whether the advertised rate is only an introductory offer.
- What kind of documentation do you need? Lenders do not require proof of your income, but they may require detailed information regarding your finances, business activities, assets and debts in order to determine your financial situation.
- What are the loan amount and terms? You should ensure that the loan amount and terms that are being offered by the lender meet your borrowing needs. Car loans generally range from between $3,000 and $100,000 and for between one and seven years.
- Are there any restrictions on your loan? Some low doc loans may have certain restrictions, for instance, the entire loan amount may only be allowed to be used to finance the vehicle, or you may not be allowed to make additional repayments. Make sure these repayments do not restrict the way you plan to use the loan.
- Does the loan offer you flexibility? Low doc loans may not be as flexible or have as many features as other car loans because they are riskier to the lender, but some low doc loans may be more flexible than others so you should compare your options before deciding on a loan.
The good and the not so good
- Low doc car loans are an option for people who may find it hard to prove their income
- These loans can be used to finance a vehicle for a small business
- These loans tend to have higher fees and rates than other car loans
- Stricter lending criteria due the irregular income
Things you might want to consider before applying
When choosing a car loan, take the time to consider your own needs and situation before you apply. As this is a low doc loan, it is not up to the lender to decide your ability to pay back the loan because they will not have the information to make that decision. Instead, it’s up to you to decide what you can and can’t afford. If you receive an irregular income you should determine your ability to be able to make the repayments.
You may also want to look at where the lender will impose restrictions on your loan that may help you make the repayments. For instance, you may want to make additional repayments if your business has a particularly good month or you may want to make a lump sum payment, but you need to see if the lender will allow this and if you will be charged a fee for doing this.
If you are purchasing the car for your business, you also need to consider the risk that the business is taking on. If you default on the loan the lender may be able to repossess assets from you and your business in order to pay back the loan.
Calculate your repayments
Before applying you should calculate how much your repayments will be with a car loan calculator. This will help you work out your monthly obligations and get a rough figure on how much you can borrow.
Further Reading: Car loan repayment calculator
How you can apply
To apply for a low doc car loan you can compare your options above, and once you have chosen a lender you can click the ‘Go to site’ button. This will securely transfer you through to the lender’s website where you fill out an online application form. As these loans are low doc you will only need to provide certain information, the requirements of which will differ between lenders. It may be a good idea to speak to your trust accountant to help you get the documentation ready. Generally, you will need to provide the following:
- Personal details such as your name, address and proof of your identity
- Proof of insurance for the car being purchased
- The value of the car
- Business details, including financials, if the car is going to be used for business
- Trust deeds and partnership agreements if relevant
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