When you're looking to finance a vehicle the most important part of qualifying is whether or not you have the ability to repay the loan. A lender doesn't just take your word for it, though, they need proof that you make enough money to cover your auto loan expenses, and proof that it's likely to continue until your car is paid off.
What Counts As Income For Car Loan
Proof of income is a document, or documents, that prove your income level and/or employment to a requesting lender. They use this information to make various calculations regarding your auto loan and your ability to repay it.
When it comes to employment history, many subprime auto lenders that assist borrowers with credit challenges require that you’ve had the same job for around six months to a year. They may also require that you’ve maintained a consistent work history for the last three years, without large gaps between jobs. A large gap is usually classified as longer than 30 days.
To provide the proper proof of income to an auto lender, you need to make sure that you know what they expect – different forms of income require different proof. As a bad credit borrower, lenders prefer you to have W-2 income, but may also accept 1099 income or unearned income such as alimony or permanent disability, but lenders vary in what they accept.
In most cases, lenders accept the following forms of proof, depending on your income type:
- Check stubs – Prove W-2 income. Must be computer-generated and have year-to-date income information listed.
- Award letter – May be used to verify steady, unearned income such as child support, alimony, Social Security, or permanent disability. Letters must be official documents and prove not only how much money you're receiving, but also that you are going to get the money throughout the entire loan term.
- Income tax documents – For proving 1099 income. If you're an independent contractor or a self-employed business owner, you're likely to be required to bring in two to three years of professionally prepared tax returns.
- Bank statements – Sometimes used to verify income if you get money from a rental property. Also used as additional proof of income along with other documents. In order for a lender to consider bank statements as proof of income, they typically need to see at least six months of statements.
- Employment letter – Employment letters themselves aren't typically considered proof of income, but if you're a bad credit borrower you may be asked to provide an employment verification letter along with your proof of income.
Your income proves not only your ability to repay an auto loan but your ability to keep the vehicle insured, fueled, and serviced while still having enough cushion in your finances to afford the rest of your bills. While your income amount plays a large part in your overall loan amount, how much debt you have plays a role, too.
What if I Get a New Job?
Lenders care about your work history because not only do they require that you have enough income to repay the loan, but also to see the likelihood of your income continuing throughout the loan term.
If you’ve been with your current employer for less than six months, lenders look at your work history to see how stable your employment has been in the past.
If you’ve been in the same line of work for some time, then a lender may be willing to accept your employment and income. For example, say you’ve been in landscaping for five years, but you accepted another landscaping gig with a new employer about two months ago. Because you stayed in the same niche, the recent job switch may not be enough to knock you out of the running for an auto loan, especially if you transitioned right from one job to the next.
Why Do I Need to Prove My Income?
Proving how much money you bring in is about more than just repaying your loan. Vehicles have many associated costs that go along with them, and lenders take all these things – as well as your other monthly payments – into account before granting you a loan.
If there's not enough wiggle room in your overall budget when you apply for an auto loan you're likely to face disappointment. Lenders want you to be successful in paying back your car loan because it costs them money if you default.
In order to prove your finances aren't stretched too thin, lenders use two formulas to ensure that you're not overextended:
- Debt to income (DTI) ratio – This tells the lender how much of your income is being used by your existing bills and payment obligations, including your estimated car and insurance payment. Lenders typically don't make loans to people who have a DTI over 45% to 50%.
- Payment to income (PTI) ratio – This lets the lender know how much of your income is going to be used by a loan payment of a certain size. You can calculate an estimated payment cap for your budget by determining your PTI. Lenders generally prefer to cap your payment, including $100 estimated for auto insurance, at 15% to 20% of your income. However, when it comes to PTI, the lower the better.
Remember: The amount of money you're eligible to borrow is directly tied to your monthly gross income. The more you make the more you may potentially be able to borrow, depending on your overall credit situation.
Income Levels and Auto Loan Approval
While it's true that your income level does impact your ability to repay an auto loan, it can also impact your ability to qualify for them. When you have excellent credit, your income may not be as big of an influence on your auto loan qualification compared to when you have poor credit.
If you're working with a bad credit lender, expect to need a minimum income of around $1,500 to $2,500 a month, before taxes, from a single job to qualify.
When you're getting a bad credit car loan through a subprime lender, income is a big part of the puzzle but it's not all you need. Your driver’s license, a utility bill, and a phone bill are also documents used to prove your residency, which along with your income help show a lender your overall financial stability. Remember that bad credit auto lenders take a closer look at your overall financial situation, too.
No Proof of Income?
If you can't prove your income you may not be able to get a loan through a subprime lender or a traditional direct lender. However, you may not be out of the running for vehicle financing. In many cases, you may still be able to qualify for a used car from a buy here pay here (BHPH) car dealer. These dealerships are the lenders and finance you themselves through in-house financing.
This means that they don't always have the same proof of income requirements as other lenders. While you will have to prove your income, you may be able to use additional income or multiple jobs to meet requirements, which you typically can't do with a subprime lender.
Be aware that BHPH dealers only sell used cars, and typically at a higher interest rate than you might otherwise qualify for with traditional or subprime lenders. If you need a vehicle now and have already been turned down by a subprime lender due to income verification, a BHPH lot may be an option for you.
Ready For Your Next Vehicle?
Even if your income and employment history check all the right boxes for an auto loan, a bad credit score could spoil your vehicle financing opportunities. Here at Auto Credit Express, we’ve been connecting borrowers to special finance dealerships for over 20 years using our nationwide network of dealers.
If you need to get on the path toward your next vehicle, we want to help. We know how to find the dealerships in your area that are signed up with subprime lenders that work with credit-challenged consumers. Don't wait to get the car you need, find a dealer near you without the stress of multiple turndowns. Just fill out our fast, free, auto loan request form and we'll do the searching for you. The process never has an obligation to buy, and you can get started from anywhere – what are you waiting for?