Vehicle financing for the self-employed
4 important facts you should know as a self-employed person when financing a vehicle:
The financing of a car purchase is different in many respects for self-employed persons than for exclusively private car drivers. In the following blog post, you can find out which aspects you need to pay particular attention to.
1. The creditworthiness of the applicant determines the financing conditions
A vehicle financing or car loan is treated by a bank like a loan. The applicant’s ability to pay, creditworthiness and credit rating are thus checked in advance and determine – as with normal credit – whether and on what terms the car financing is offered. The bank’s primary concern is to assess the applicant’s ability to pay in order to mitigate its own risk. This assessment process usually involves checking:
- Incoming payments to the business account
- A business management analysis (BWA) or similar financial document
- the latest income tax assessment
In addition, the applicant must specify exactly for what purpose he uses the car, because it can make a difference in the financing whether a car is used only privately or also for business purposes.
As a self-employed person, you should always remember that the bank considers you both in your private and business life. Even though your private creditworthiness will most likely be assessed first in the case of a car loan, you should be aware and familiar with both your private creditworthiness and your creditworthiness as an entrepreneur. What the difference of these two credit ratings is and why it is important, we have explained several times in our Infothek, z.b. here or also here.
2. A high down payment for vehicle financing has a positive effect on creditworthiness
Usually, a down payment, regular loan installments and a final installment are agreed upon as part of the application for vehicle financing. Final and closing amount can usually be chosen as a self-employed person. It should be noted that the amount of these amounts also affect the amount of the rate. Whether one would like to pay down a lot at the beginning or repay a lot at the end of the term (“balloon loan”), everyone must decide for themselves. If the own business has a running cash flow, one can serve even a higher rate well. For those who have had to save for a longer period of time and would like to minimize their personal risk, a larger down payment is certainly more sensible. The latter variant is also advantageous for the credit rating of the applicant of the car loan.
3. Vehicle leasing with sog. “Three-way financing”: useful, but expensive
Some providers in the field of car financing for the self-employed also offer vehicle leasing. For example, there is “three-way financing”, which allows the return of the vehicle at the end of the term. Alternatively, after paying the monthly loan installments, you can negotiate suitable follow-up financing or pay off the final installment in full. Three-way financing is particularly flexible for the self-employed. However, the providers also make this return option pay well, as one usually notices when examining the total cost of the lease. The flexibility is often priced with correspondingly higher rates.
4. Self-employed persons can deduct leasing costs from their taxes
Finally, another aspect of vehicle financing for the self-employed is the tax implications of a car purchase. Normally, the purchase price can be offset against input tax. Another option is depreciation, which reduces taxable income accordingly. Interest or leasing costs are also tax deductible.