Income Explained For Car Buyers

Why Lenders Care About Your Income

Stable income is important because you can't repay a loan without money. Lenders don't like to take a big risk on someone who isn't likely to repay a loan, especially if that borrower is also struggling with credit issues. So, one thing that lenders verify is that you have a stable source of income before you take on a car loan.

To do this, they calculate your debt-to-income (DTI) ratio, a number that tells lenders how much of your income is available to be used toward a vehicle. Your DTI shows a lender how much of your income is available by adding up all your monthly bills and payments, and subtracting them from your gross (pre-tax) monthly income.

Lenders typically have a minimum income amount that they require you to meet for loan approval. The more income you have, the better rates and terms may be available to you. If you don't meet the minimum income amount from a single job, you're typically going to have a more difficult time getting the auto loan you need. If you have poor credit, this is even more true.

However, just like your income amount matters, the type of income you have matters as well. When you're getting a bad credit car loan, lenders need to see proof that you make what you say you make, but if you don't have a standard W2 income job, proving your income to a lender can be more difficult or require more documentation.

Here's a look at the different types of income out there, and how you can use it toward your auto loan.

What Counts as Income for an Auto Loan?

There are several types of income out there, and many of them will qualify you for an auto loan under the right circumstances.

W-2 Employment Income

W2 income is regular employment income that comes from a job where you are an employee. This means you typically get paid weekly, biweekly, or monthly with a standard paycheck from which taxes are taken. This is the most common form of income. When you are paid as a W2 employee, you must verify your income for a lender by providing at least 30 days of computer-generated check stubs showing year-to-date income.

Self-Employment Income

This income is made as a business owner or a contract worker. You're not considered an employee, and you file a different type of tax form than a W-2 employee. Typically, in these situations, taxes aren't taken out of a check, and you must report and pay your taxes on a regular schedule. To prove this income to a lender, you are typically required to provide at least three years' worth of tax forms and bank statements to support your income claims.

Government Benefits

There are a lot of different forms of government benefits that count as income. These can include:

• Social Security
• Social Security Disability Insurance
• Survivor's Benefits
• Workers' Compensation
• Veterans Benefits
• Some Temporary Disability

Retirement Income

This is a government benefit that covers your expenses after you're no longer working, and it can be used to get a loan, as long as you have the proper proof. Like with all income that's not traditional W2 income, you may need bank statements and tax returns to prove your income from retirement is consistent. If you run into problems with a lender not accepting your retirement income, you can also get a co-borrower who is working.

Alimony and Child Support

Alimony and Child Support are funds that can go towards income, but there are circumstances that have to be met. You need an award letter as proof of income, and if you're using child support as income, it needs to last for the entire duration of the loan. This means that if you're claiming child support as income to take on a 60-month auto loan, your child needs to be receiving support for all 60 of those months, and you must be able to prove consistent deposits. These alternate forms of income are often supplemental and are only used as income by a lender if you ask them to.

Investment and Rental Income

Some types of investment income, such as dividends and interest income, can sometimes be used as income for a car loan if you have the proper documentation and if your payments are consistent.

Income from a rental property can also be used, but you will need bank statements showing regular deposits and proof that the rental will generate steady income for the duration of the loan.

Gig Economy and Freelance Income

This is a type of self-employment income that may or may not be used by a lender. If you're a freelance designer who brings in steady work, you're more likely to be approved than a freelance designer who occasionally gets a job through a freelance website. The deciding factor is typically steady, verifiable income. You'll have to bring in tax forms and bank statements to prove you're income is steady if you want it included in your income for a car loan.

Types of Income Usually Not Accepted

Anything non-taxable, inconsistent, or temporary is not typically allowed to be used as income for an auto loan. This can include:

• Unemployment
• Temporary Disability Benefits
• Undocumented cash
• Crowdfunding income
• Gambling winnings
• Loans
• One-time gifts
• Profits from Marketplace sales or garage sales
• Crypto Trading Profits

How to Prove Your Income

To prove your income for regular employment, you need at least 30 days of computer-generated check stubs, and all other forms of income require various proof. In some cases, this means bringing in an award letter, a letter of employment, your bank records, and a copy of your tax returns, which may be required depending on what type of income you're trying to prove.

Tips to Improve Approval Chances

When it comes to income, having all your documentation together before you visit the dealership is important. This is one of the best ways to improve your chances of income approval. If you need a boost in the amount of income you're showing, a co-borrower is the only type of help that allows you to combine your income with someone else's.

Other ways to improve your approval chances for an auto loan include knowing where your credit stands, having all your documentation for the loan ready, and bringing in all your proof of stability, ability, and willingness to repay your loan. When it comes to bad credit auto loans, lenders typically require more documents than other lenders, so be sure you know what car loan requirements you have to meet before you head to the dealership.

FAQs

Will unemployment benefits count as income for a car loan?

No. Due to the temporary nature of unemployment, it is typically not seen as valid income for an auto loan. In some cases, a short-term loan may use this income, but that is rare.

Do I need a co-signer if I have low or no income?

Sometimes, a lender may require a bad-credit borrower to have a cosigner to approve them for an auto loan. If you do need a cosigner, they won't help you with income on an auto loan, since a cosigner only helps show a better credit score, and their income isn't considered for auto loan approval.

In order to use someone else's income on your auto loan, you need a joint loan with a co-borrower. This is different than a cosigner, and in some cases, may be the best bet when you can't go it alone.

What if I earn income in cash—can I still get a car loan?

Possibly, but it's more difficult to prove your income. Cash employees may need bank statements, tax forms, and a letter from their employer showing hours and income in order to get approved for a car loan.

How recent should my income documents be?

As current as possible, you need at least 30 to 90 days of income showing on computer-generated check stubs or in bank statements. If you need tax returns to verify your income, it's recommended to have at least three years' worth of taxes to show a lender.

Do I need to show income if I have great credit?

Typically, income is verified for all auto loans. Even if you have stellar credit and are using a large down payment, a lender still needs to verify that you have steady income and will repay your loan on time.

Is foreign income accepted for a car loan in the U.S.?

Yes, it's possible, but the application process and proof of income needed are often greater than even that of a bad credit borrower.