Employment matters when it comes to getting an auto loan since you have to have a way to repay a loan. Typically, lenders prefer borrowers who have steady, proven income through a stable W2 job. However, not everyone who works has the same income verification, or even the same type of income. When it comes to having a job, lenders tend to like borrowers who do.
Here, we'll go over why employment matters, what lenders look for as requirements, and what counts as proof of income. Let's take a look.
Why Employment Matters for a Car Loan?
Lenders won't issue a car loan to a borrower if they don't have a way to repay the debt. Typically, this means proving your employment status – namely that you're employed full time, and make enough money from your job to satisfy the minimum income amount.
Without verifiable income from a proven, taxable job, you typically won't be approved for an auto loan, especially if you're struggling with a poor credit score.
Employment Requirements for Car Loans
You can't get a job, and then just go sign up for a car loan since you're employed. Lenders usually have set minimum standards when it comes to job history, minimum income amounts, and types of income that qualify you to get a loan.
The minimum employment duration is usually six months to one year on a job, with a solid work history of at least three years. Lenders prefer no gaps longer than 30 days between employment.
When it comes to minimum income levels, lenders want you to have at least $1,500 to $2,500 a month in steady income. A minimum monthly income helps level the playing field for lenders and helps to ensure that borrowers can repay their loans. Lenders want this amount to come from a single job, so if you have more than one, you need to make sure the minimum is met from the income of your primary employment.
When you're self-employed, you need to take extra steps to ensure you can verify your income for a lender. This is especially true for bad credit borrowers who are self-employed. You will need to provide your 1099 forms in conjunction with other documents like tax returns and bank statements, since you don't earn a check like an employee.
What Do Lenders Look for in Employment?
Employers look for stability in your employment. The more stable a person is in regard to employment, the more likely they are to be able to repay their loan. They look for consistency in your work history, not necessarily that you've stayed at the same job, but that you've maybe stayed in the same field of work. This helps them determine risk when they're assessing whether to grant you a loan.
Proof of Income for a Car Loan
In order to prove your employment and income status, lenders collect various forms of proof of income, depending on your employment type. Typically, a lender requires a computer-generated pay stub if you are an employee, and 1099 forms if you're self-employed or a freelance worker. Along with these, you may provide bank statements and tax returns to show consistent income.
What Qualifies as Proof of Income?
- Pay Stubs – If you're a W-2 employee, lenders prefer computer-generated check stubs showing year-to-date income information.
- Tax Returns (W-2 or 1099 Forms) – In lieu of computer check stubs, you can bring in two to three years' worth of tax returns to prove your income. This is typically reserved for self-employed persons, as they don't get checks from themselves.
- Bank Statements – Bank statements can be presented as supplemental documents, but without employment verification, lenders don't typically accept bank statements as proof of income.
- Employer Verification Letter – If you're new to the job market, or are making a career move, and need a car loan, a letter from your future employer saying you've been hired and what your expected salary will usually suffice.
- Social Security or Pension Statements – If you're no longer employed, but still receive social security, disability, or pension payments, you may have enough income to prove you can take on a loan. You will have to provide your award letter, and the payments must continue for the duration of your loan.
- Alimony or Child Support Documents – Like social security payments, Alimony or child support can help your lenders verify that this income is part of your monthly dependency. However, as it is unearned income, lenders don't typically include it in your income. It may help you take on a bigger loan by being included in your DTI calculations, though.
Exceptions and Alternative Income Sources
If you meet certain criteria, lenders may not find it necessary to check your income. These things include your credit score, down payment amount, and the price of the vehicle.
- Credit score – If your credit is stellar, around 800 or above, a lender may not worry about your income verification since your credit report is likely pretty spotless.
- Down Payment amount – If you are providing a very large down payment, around 50% of the auto loan, a lender may not worry so much about your employment verification if you have decent credit.
- Vehicle price – The less expensive the vehicle, the less likely you are to be subject to many extra documentation requirements if your credit is good.
- Extremely low DTI – If your bills come out to next to nothing compared to your income, a lender may not do much digging into your employment. Lenders like your debts to take up no more than 45% of your pre-tax income to approve a loan.
If you're a retiree and no longer have a traditional income to rely on, lenders consider things like retirement benefits, pension, and social security benefits. To prove this income bring in your award letter(s) and possibly a few years' worth of tax documents like your 1099-R to help prove that you can afford the loan.
How to Provide Proof of Income?
Proof of income can be provided in person at the dealership with either your check stubs, tax forms, or bank statements. Remember, it's up to the lender what is required as proof of income, and how much documentation you need to provide typically depends on your credit score and other loan factors.
Conclusion
When it comes to getting a car loan, it's a good idea to have stable employment to repay your loan. Lenders typically like to see that you can cover your payments with the income from just one job, but if you have more than one, it could help you by lowering your DTI. Lenders aren't trying to hassle you into providing unnecessary information; they just want to assess your loan risk so they can feel confident when approving you for an auto loan.
