As a self-employed professional, bringing home a steady pay check every month is never guaranteed. Income can fluctuate dramatically based on business cycles, client payments, and general economic conditions. So, when planning to take on a major recurring expense like a used car loan, meticulously managing your overall finances before and after securing financing becomes critical.
With an irregular income flow, a vehicle's Equated Monthly Instalment (EMI) that may be affordable one month could become difficult during slower business periods if cash reserves are not managed prudently. As such, self-employed applicants need to approach arranging auto loans with careful consideration of budget planning, credit habits, savings buffers, and contingency mechanisms. In this article, we will explore used car loan tips for self-employed individuals:
Key Strategies to Manage Your Finance When Taking Used Car Loan
Follow these used car loan tips for self-employed individuals to ensure you can manage the additional debt obligation:
1. Research Loan Options Thoroughly
As a self-employed applicant, you have loan options for used car loans beyond traditional loans that are more flexible for irregular income streams. Compare offerings from non-banking financial companies (NBFCs), fintech loan providers, and peer-to-peer lending platforms in addition to banks. Consider terms beyond just interest rates on used car loans - see who offers faster approval, flexible repayment structures tailored for self-employed needs, etc. Evaluate the pros and cons of each to match a lender best suited for your financial situation.
2. Gather Necessary Income Documentation
Loan providers will request extensive financial statements and tax records spanning the last 2-3 years to verify your repayment capacity as a self-employed individual. Be ready to provide Income Tax Returns (ITRs), bank statements, bookkeeping records, and potentially even client invoices or order receipts. Have your financial paperwork organised to make the loan application and verification process quicker. Some fintech loan providers may pull alternate data like digital transaction records as well when assessing your creditworthiness.
3. Account for Down Payment Requirements
Used car loans often require a 20-25% down payment from applicants, but it varies from one loan provider to another. As a self-employed person, you need sufficient cash savings set aside beyond just affording monthly EMIs. Include the down payment amount as part of your overall budget for purchasing the vehicle. Having adequate savings will also improve your debt-to-income ratio assessed during loan approval.
4. Limit Your Purchase Budget
Carefully consider what used car purchase price aligns with your current earnings and expenses. Just because a lender pre-approves you for a certain loan amount does not mean you must utilise that full amount. Be realistic about what is affordable now and in the coming years based on your other financial obligations. Avoid over-borrowing just to purchase a more luxurious car. Match the loan amount and tenure to suit your budget.
5. Factor in Additional Ownership Costs
Beyond the car loan EMI, budget for other recurring costs of owning a vehicle, like fuel, insurance, maintenance charges, parking fees, tolls, etc. Self-employed individuals have highly variable income month-to-month, so ensure you have budgeted for these additional auto expenses in lower revenue periods. It helps give a financial cushion in case earnings slow down temporarily.
6. Split Large Payments into Monthly Costs
Several ownership expenses such as insurance premiums tend to have large annual or bi-annual fees. Rather than paying these in lump sums when they are due, proactively divide up costs so you reliably set aside money each month in your budget. Spreading out big payments helps make managing your cash flow easier.
7. Leverage Technology Tools to Assist Planning
Digital applications help simplify financial management for irregular income streams. Use budgeting apps or money management software to get reminders about upcoming payments, track variable earnings vs expenses month-to-month, categorise spending, etc. Technology assists in monitoring cash flow closely across the ups and downs of self-employment.
8. Pay Fixed Expenses First Each Month
As a self-employed person, prioritise paying essential regular expenses early in the month, like EMIs, utility bills, insurance premiums, etc. With income fluctuations, at least ensuring fixed payment obligations are addressed gives stability. Adapt remaining variable spending to align with that month’s earnings level while keeping these fixed commitments first.
9. Build up Emergency Savings
Having an emergency fund provides a financial safety net for unforeseen expenses that can derail repayment capacity. Whether it is a medical emergency, family requirement, or a slow business period, you need accessible savings equal to 6-12 months of fixed expenses as a self-employed individual. Make sure to gradually build this contingency fund for the long run.
10. Explore Payment Safeguard Options
Some NBFC lenders provide tailored loan protection plans for self-employed customers to cover EMIs in case events like hospitalisation, disability, loss of job, etc, that may impact income streams. While adding cost, payment safeguard mechanisms provide a backup option during difficult periods. See what options may be available from your lender or third-party insurance providers.
11. Maintain Good Credit Habits
Always pay loan EMIs and credit card bills completely by the due dates. While occasional issues are understandable for self-employed people, routinely missing or defaulting on payments will quickly damage your credit score, making future borrowing very difficult at reasonable rates. Follow good credit habits to sustain access to financing when required.
Conclusion
The key to managing finances for a used car loan as a self-employed applicant is diligently tracking income and expenses month-to-month. Careful planning, prioritising fixed payments, maintaining emergency savings, and employing technology tools can be some useful tips for used car loans for the self-employed.
Shriram Finance offers used car loans tailored for self-employed individuals, with flexible documentation and repayment options. Following the above tips can help you make the most of their offerings.
