If you’re an independent contractor or self-employed, you don’t have a W-2 to prove your yearly income. If you receive a 1099 at the end of the year instead of a W-2, you may find it difficult to get approved for a car loan by not meeting subprime lenders' minimum income and proof of income requirements.
Getting an Auto Loan as an Independent Contractor
Subprime lenders generally require a minimum monthly pre-tax income of $1,500 to $2,000. When you’re a regular employee, a recent computer-generated pay stub can satisfy the proof of income requirement. If you’re self-employed or an independent contractor, you typically need to bring in your most recent tax return (or possibly two or three, depending on the lender) to prove you meet the income requirement.
Where getting approved can get tricky is if you deduct too many expenses or don’t report all of your income. The income after you’ve deducted your expenses on your Schedule C is what lenders look at. If you don’t accurately report what you make, including all tips if you work in a service industry, you could have a problem getting approved for an auto loan.
Debt to Income and Payment to Income Ratios
Besides not meeting the minimum income requirement, you could negatively affect your debt to income (DTI) and payment to income (PTI) ratios. Subprime lenders use your net income listed on your tax return to calculate these ratios. If you actually make more money than you reported, there’s an excellent chance your DTI and PTI ratios are off, which could mean the difference between an approval and a rejection. Most lenders like to see a DTI, including a car and insurance payment, of no more than 45 to 50 percent of your pre-tax income, and a PTI of no more 15 to 20 percent of your income.
For example, let’s say you record your annual income as $28,800 ($2,400 a month), but actually make $38,400 a year ($3,200 a month) and have monthly bills of $1,300. Your reported DTI ratio would be 54 percent and over most subprime lenders' accepted range, when it's actually at 41 percent.
As for your PTI ratio, let’s say you have an estimated combined car and insurance payment of $500. Using the same income you listed, the PTI ratio would be 21 percent. If you used the actual income amount, your PTI would be a more reasonable 17 percent.
The Bottom Line
If you're self-employed or an independent contractor and need an auto loan, you better be listing your income information accurately and avoiding too many expense deductions – especially if you have poor credit. The income after expenses that’s listed on your tax returns is the figure subprime lenders use to qualify you for a loan when you’re self-employed. If your income isn’t the issue, but your credit is, you may still find it difficult to get financed through a traditional lender.
Luckily, our experts at Auto Credit Express can help you get started on the car financing journey. We work with a nationwide network of dealerships that are signed up with special finance lenders that look past your credit issues to qualify you for an auto loan. Take the first step toward getting matched with a local dealer today by filling out our free and secure car loan request form.