Consumer Car Buying Advice Blog

In a bad credit car loan or a high risk car loan, being able to prove the income that is listed on the credit application is very important. Since many employees in the food service industry don’t report all their tips, this can cause problems when it comes time to get a car if they have less than perfect credit.

A problem with bad credit car loans

Here at Auto Credit Express, our experience tells us that one of the most difficult types of car loans to get approved is for customers that are waiters or waitresses. Here is why that’s the case.

Tip income and the Internal Revenue Service

Many wait staff employees report only a portion of their tips on their tax returns. This practice has been going on for years. For many waiters and waitresses, it is a way to avoid paying income tax on much of their income. When it comes to the reporting of tip income, the law is very clear. If you receive tips, here is what the IRS requires you to do:

1. Keep a daily tip record.
2. Report tips to your employer.
3. Report all your tips on your income tax return.

The rules are simple. If you receive a tip, it needs to be reported as income. Tips made via credit card are usually added to your yearly W-2 (wage and tax statement) by your employer. Tips that you receive in cash are harder to track (many employers simply ignore them) and it is the responsibility of the employees that receive them to report the amount to employers. The IRS has even created a special form that you can fill out on a daily basis to keep track of your tips. It is the responsibility of the tipped employee to not only report this amount, but to pay taxes out of this amount to the employer. Many waiters and waitresses ignore this and think that they are saving money by not claiming and reporting this income. While this may decrease the amount of income tax that is paid, it can make it very difficult to buy a car – especially with a bad credit car loan.

Proof of income for high risk car lenders

While regular banks usually don’t require proof of income for a car loan, this isn’t the case with bad credit lenders. If the total income is not listed on a W-2, pay stub or on your tax return, it might as well not be there. Even if you have bank records that support this additional income with daily or weekly deposits, if it isn’t listed on a pay stub or reported on your tax return, you don’t have “proof” of your income.

How proof of income will affect a bad credit car loan

Most bad credit car lenders have minimum monthly income requirements. They also use your stated income to compute your monthly debts in order to come up with a budget for your car payment. This could affect you in two ways:

1.    Most subprime lenders have minimum monthly income requirements that range from $1,500 to $1,800. Let’s say you are a wait person and your base wage is $3.00 per hour. This computes out to $516 on a monthly basis (based on a 40 hour work week and 4.3 weeks in a month). Even if the employer reports tip income of $175 per week (based on credit card sales), this still only brings an additional $753 per month to the table. Even though unreported tip income may be another $2,000, the total reported income for the month is only $1269. In this case, the minimum income requirements for the lender have not been met and this applicant would not qualify for a loan.

2.    Even if the reported income meets the lender requirements, there may be monthly expenses that are out of proportion to this income. As an example, reported income of $2,000 per month includes a base hourly wage and all reported tips. With an actual total monthly income of $4,000, a reasonable amount of monthly expenses could be $1800. Even though the debt to income (actual) is fine, the ratio between the reported income figure and actual expenses would not qualify this applicant for a loan.

The Bottom Line

If you receive a significant amount of your income from tips, you need to report this income to your employer. This situation is even more critical if you need to purchase a car with a bad credit car loan. If your income is not reported on a W-2, or you don’t include it on your income tax form, the banks that do subprime loans will not allow you to count it as income for a car loan.

For more information on tip income, visit the IRS website at: http://www.irs.gov/pub/irs-pdf/p531.pdf. For more information on bad credit car loans, visit our web site at www.autocreditexpress.com. There you will find a car loan calculator and more useful information on bad credit car loans.

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