As a borrower needing a bad credit auto loan, you may find it difficult to get approved if you work for yourself. For self-employed individuals, bad credit lenders require very specific documentation as proof of income. Those who are unable to provide it may be forced to look for a car loan through less conventional methods.
Requirements for Bad Credit Auto Loans
Whenever a borrower gets a bad credit auto loan, they need to meet certain requirements in order to be approved. Subprime lenders have the ability to work with bad credit borrowers, and they ask for documentation to show that borrowers have the ability, stability, and willingness to take on a car loan.
These documents include proof of income, employment, residence, identification, and a working phone, as well as a list of personal references. An employee and a self-employed person are required to provide the same documentation for most of these requirements – except proof of income and employment.
Borrowers generally have to make a minimum income of $1,500 to $2,000 a month before taxes in order to qualify for a subprime auto loan. They also need to have at least three years of employment history with no gaps longer than 30 days between jobs.
As a W-2 employee working for someone else, a borrower is typically required to provide their most recent computer-generated check stub showing year-to-date income. This serves as proof of both income and employment. A self-employed borrower, however, doesn't have the luxury of a check stub for proof.
Proof of Income for Self-Employed Borrowers
As a self-employed person, subprime lenders typically ask that you provide three years' worth of tax returns in order to prove you have enough income, and have for the minimum required length of time.
Many people wonder why there's such a strict requirement on proof of income and employment, asking if they can just provide bank statements instead. Unfortunately, bank statements don't count toward this because they don't prove your income, or that it's even taxable income.
For loan providers, taxable income is important. If your income isn't taxable, then lenders don't count it as qualifying income for a car loan. If you're self-employed and don't claim all of your income on your tax returns, this may also become a problem if you're trying to qualify for a bad credit auto loan.
Alternative Options for Bad Credit Borrowers
If you can't provide proof of income with your tax returns, you're not out of options. However, they may not be what you're hoping for. Typically, when a self-employed person can't provide proof of income, their only option is to get a used vehicle through a buy here pay here (BHPH) dealership.
BHPH dealers are also lenders, and they usually don't require the same proof of income. As long as you have a qualifying income, you can typically qualify through one of these car lots, regardless of its source.
However, getting a loan through a BHPH dealership means that you're likely going to pay a higher interest rate, make a larger down payment, and have a more limited selection of vehicles to choose from.
Getting the Right Kind of Car Loan
As a self-employed bad credit borrower, it comes down to whether or not your income is accurately reported. If you keep good tax records that prove you make enough, you should have no problem going through a subprime lender at a special finance dealer.
At Auto Credit Express, we work with a nationwide network of special finance dealerships that have the lending resources to help borrowers in unique credit situations. Let us get you on the path toward your next car by matching you with a dealer near you. Get started right now by filling out our fast and free auto loan request form!