What might happen if you have less than perfect credit and you are your own boss
What you need to know
Consumers who are credit-challenged and work for themselves need to understand the problems they might encounter when applying for an auto loan.
In fact, this has been a major issue for us here at Auto Credit Express during the entire twenty years we've been helping people with credit problems find a dealer so they can buy a car. We even devoted most of our web site to spelling out this and other problems so that applicants will know, going in, what to expect of the bad credit car loan process.
Unfortunately, a buy here pay here or tote the note dealer is sometimes the only choice for self employed individuals with less than perfect credit – in most cases due to the fact that they don't report all their income when it comes time to file their taxes.
The fact is, if they only report a portion of their income, it can reduce the taxes they pay, but it can also prevent them from getting a car loan. This is especially true if their FICO scores fall below 640.
While traditional banks and credit unions typically don't require proof of income, this isn't the case with subprime lenders. Their general rule of thumb is that a self-employed applicant's income can only be verified with a professionally prepared tax return. If the required income isn't listed on this type of tax return there is no proof it exists - even with supporting bank records.
Most high-risk lenders have minimum monthly income requirements. Income verified by wage statements or tax returns is used to qualify for a loan and compute a debt-to-income (DTI) ratio and set a budget for a car payment. This can affect self employed car buyers in a couple of ways:
Subprime auto lenders typically require a minimum income of between $1,500 and $1,800 per month. For self employed people this means reporting a minimum yearly net profit (after expenses) anywhere from $18,000 to $21,600.
Even if the income requirement is met, there is the chance that monthly expenses could be way out of proportion. For example, with a reported income of $2,000 per month there could be actual income of $3,500. It also follows that reasonable monthly expenses could be $1800. In this case, even though the actual DTI ratio is acceptable, the DTI ratio with the reported income is not and the loan application would be denied.
The Bottom Line
Poor credit and being self employed usually means a credit denial from a subprime lender if income is underreported and results in a high debt to income ratio.
If you have any more questions, check out our answers at Auto Credit Express, where we send all our auto loan applicants to dealers that understand and can offer them their best chance for an auto loan approval.
So if you're ready to reestablish your car credit, you can begin now by filling out our online car loans application.