Why buyers with a history of problem credit face a difficult time qualifying for a car loan if all or even some of their income is paid in cash

What we know

Car shoppers with poor credit that receive all or some of their income by getting paid "under the table" typically don't realize why this practice could very well prevent them from getting approved for a car loan from a high-risk lender.

However here at Auto Credit Express we know very well why this happens because for the past two decades we've been helping car buyers with bad credit looking for online auto loans find the right kinds of new car dealers that can offer them their best opportunities for auto loan approvals.

Having said that, here's our explanation for why this type of income can complicate the loan process:

Looking at income

Two reasons people with decent income but with low FICO scores end up settling for a BHPH car loan is because they either don't get a W-2 from their employer or the W-2 they receive doesn't reflect all their earnings.

Usually both these situations occur because all or, in some cases, just part of their income is given to them "under the table" or "off the books." This is done either using cash or in the form of a check that doesn't show any deductions for payroll taxes (income, social security and Medicare).

The fact is that even workers who are legitimately classified as non-employees (those who are non W-2 independent contractors) should still receive a form 1099-MISC form that reports their total earnings or that portion of their pay not subject to employment taxes.

But employees who are paid in cash or with a regular check are still required to file a tax return and declare their income. This income, minus expenses, should be reported on Schedule C of their 1040 income tax form.

Reporting this income is even more critical for car shoppers with poor credit scores. Here's why:

Verifying income

While traditional lenders in most cases don't require any type of proof of income as part of the loan process, this isn't how it works in the world of subprime auto lenders.

In the case of these high-risk lenders, applicants are required to furnish paperwork that proves how much they earn. Not only that, but the required document to prove income is either a W-2 or, lacking this, multiple years (at least 3) of professionally prepared tax returns (since these lenders must be able to see an established level of income). Without these documents, an income level can't be proven to these lenders – even if the applicant has the deposit records from their bank.

Subprime lending

Subprime lenders ask for this information because they will typically establish minimum income levels that borrowers are required to meet in order to qualify for one of their loan programs. They use the income listed on a W-2 or, in the case of non-employees, the after tax income reported on their tax returns, to compute a debt-to-income ratio. In this way a lender can then determine a logical range for an applicant's car budget.

So as you can see, this will probably affect people with cash income in a couple of ways:

1. Minimum monthly income requirements typically range from $1,500 to $1,800. Applicants earning at this level but with W-2 forms and/or tax returns that don't show it will not qualify for a loan.

2. If an applicant's reported income meets these requirements but the actual income is higher, there's frequently the chance that their monthly expenses could be excessive in comparison. For example, if an applicant's actual monthly income is $3,500 and that person has monthly expenses of $1,800, the corresponding debt to income ratio would typically be no problem. But if that person reports an income of just $2,000 per month, the debt ratio will be too high and the loan application will be denied.

As we see it

Consumers with crummy credit where all of part of their income is either in cash or with a non-payroll check and not reported on a W-2 should know that failing to report their entire income could result in a denial of credit for a car loan. For buyers that find themselves this situation the only remaining option is usually a BHPH dealer.

Car shoppers not facing this issue should know that Auto Credit Express specializes in matching applicants with auto credit issues to dealers that can offer them their best chances for getting approved auto loans.

So if you're ready to begin that process, you can start it now by filling out our online auto loan application.