Improving your car loan approval chances if you have credit issues and you are either self employed or an independent contractor.
If all or part of your income comes from self employment or if you work for one or more employers as an independent contractor, it's important that you understand how this can affect your application for credit if your FICO scores are low.
Here at Auto Credit Express we know how this type of income can impact the chances of auto loan approvals because we've been helping credit-challenged car buyers for over two decades.
Unlike regular employees that typically receive a W-2 wage statement at the end of the year, independent contractors receive a form 1099 from their employer (or "employers" since being an independent contractor doesn't necessarily tie you to just one employer).
This income is then reported on a Schedule C of an income tax return and, minus expenses, results in the income after expenses (net income) that is then reported on a Form 1040 Federal tax form.
In some cases, because it reduces what they have to pay in taxes and thus saves them money, people who receive this kind of income try to reduce their taxable income by doing some "creative bookkeeping" by increasing their expenses. This reduces what they'll have to pay in taxes but it can also lead to problems – not the least of which is an IRS audit.
But today we're not concerned with what the IRS might or might not do, but rather the problems this sometimes creates if the FICO scores of these individuals fall below 640 and they need to apply for a car loan with a high-risk lender.
Because while traditional lenders usually don't require proof of income, this isn't the case with lenders that work with people that have credit problems.
With both self-employed persons and independent contractors, the income after expenses (net income) that is reported on a tax return is the income these lenders will use to qualify that individual for an auto loan.
Subprime auto lenders typically have minimum monthly income requirements. This means, in the case of independent contractors and self-employed persons, they use the net income reported on tax returns to determine if an applicant meets their income requirements. They also use this figure to determine a debt-to-income ratio as well as to compute a car payment budget.
Typically, things can go wrong at this point in one of two ways or even both:
1. High-risk lenders typically have minimum income requirements ranging anywhere from $1,500 to $1,800 per month. This means a tax return needs to reflect a net income of, at a minimum, anywhere from $18,000 to $21,600 a year.
2. Even if the reported net income meets this standard, total monthly expenses (rent, mortgage, utilities, etc.), when compared to this income, are often too high because the actual income is more. If this is the case, this means that the debt ratio is too high and, consequently, the loan application will be turned down.
It's also important that the correct net income is reported for not just one year, but every year. That's because many subprime lenders will ask for multiple tax returns to prove a specific historical level of income stability.
The Bottom Line
If you're self employed or an independent contractor and your car credit is bad, it's important that you correctly report your income and expenses every year. By doing this you'll give yourself a better chance for a loan approval.
Just as importantly, we want you to know that that Auto Credit Express can help you find a dealer that can offer your best opportunity for approved auto loans.
So if you're ready to reestablish your auto credit, you can start here by filling out our online car loans application.