People with bad credit that are self employed or independent contractors need to be particularly careful that they report their income correctly otherwise they might not qualify for a bad credit auto loan
About 1099 income
We have been in the bad credit car loan business long enough here at Auto Credit Express to realize that one of the most difficult approvals to receive is for credit challenged consumers who are self employed, or anyone else that depends on a form 1099 for their earned income.
So before you fill out our online credit application to finance either a new or a newer pre-owned vehicle with auto loans for bad credit, you need to make sure that you are correctly reporting all your income to Uncle Sam. Because if you aren't, your only choice for a car may be a tote the note dealer – which could mean settling for an older car, higher interest rates and a greater chance of repossession.
Independent contractor income
One of the most difficult types of car loans to get approved is for customers that are either classified as independent contractors or those who are self-employed. Due to the nature of these types of business and the common practice for these individuals to compute a business profit as low as legally possible, much of the income that these individuals receive isn't always reported correctly on tax returns. In truth, this practice might save them money on taxes in the short term, but it could also prevent them from getting a loan, especially if their FICO scores fall below 640.
The IRS and independent contractor and self-employment income
Although their incomes are often reported on a Schedule C, independent contractors and self-employed individuals differ from each other.
Someone who is self employed is responsible for keeping their business books in order and reporting a profit or loss on the Schedule C of their 1040 income tax form.
If you are an independent contractor, you receive a form 1099 (specifically a form 1099-MISC) from your employer. You are then required to report this income, less your expenses, on the Schedule C of your 1040 income tax form. In addition, you should know that the IRS has specific rules on whether or not you are actually an independent contractor.
Independent contractor or employee
In determining your employment status, the IRS looks at 3 things: behavioral control, financial control, and the relationship of the parties.
Behavioral control – if you receive extensive instructions on how, when or where to do the work, what tools or equipment to use, what assistants to hire to help with the work or where to purchase supplies and services, you are usually considered to be an employee. If not, you could be an independent contractor. Extensive training on how to perform the work also might suggest that you are an employee.
Financial control - If you have a significant investment in your work, if you are not reimbursed for some or all business expenses, or if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.
Relationship of the parties - If you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor. A written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine your status based on other facts.
Proof of Income
Here is how both self employed individuals and independent contractors relate to bad credit lenders: While traditional lenders usually don't require proof of income, this isn't the case with bad credit car loan banks and other lenders. If your total income is not listed on a W-2 or on a professionally prepared tax return, it might as well not be there. Even if you have bank records that support this income with daily or weekly deposits, if it isn't listed on your tax return, you don't have “proof” of this income.
Most subprime lenders have a minimum monthly income requirement. They use this “stated” income to compute a debt-to-income ratio in order to come up with a budget for a car payment. This can affect individuals with self employment and 1099-MISC income in two ways:
1. Most subprime lenders have minimum monthly income requirements that range from $1,500 to $1,800 per month. This means that your business needs to report a net profit of anywhere from $18,000 to $21,600 per year
2. Even if the reported net profit meets the lender's requirements, there is always the chance that your monthly expenses are out of proportion to the stated income. As an example, let's say there is reported net income of $2,000 per month. For the purposes of argument, let's say that your actual monthly income is $3,500 and there are also reasonable monthly expenses of $1800. In this case, even though the actual debt to income ratio would be acceptable to the lender, the difference between the reported net income and your actual expenses would not qualify you for a bad credit auto loan.
Your tax forms
In addition to the debt to income requirements, auto loans for bad credit lenders will look at line 31 of your Schedule C of your 1040 form which, by the way, must be professionally prepared, and average this income over your last two tax returns in order to determine your income to qualify you for a loan.
One more thing: no loans will be made for commercial vehicles.
As we see it
If you receive your income as a self-employed individual or an independent contractor and it looks as if you may need to finance your next vehicle using car loans with bad credit, you need to take into consideration the net income you report as well as how this net income affects your debt to income ratio.
If your income tax return is not showing sufficient income, or if your monthly debts are not sufficiently offset by enough monthly income, the lenders that originate bad credit car loans will not approve your credit application.
For more information on 1099 and self employment income, visit the Independent Contractor or Employee portion of the IRS website.
For more information on bad credit auto loans and before you buy a car from a local tote the note car dealer, consider applying for a bad credit auto loan from Auto Credit Express, a leading national car buying service for people with bad credit.
So if you are serious about reestablishing your car credit, you can begin the process by filling out our online bad credit car loan application now.