With unemployment hitting record highs in the past few years, there has also been an increase in people becoming self-employed by starting to freelance or picking up a side hustle in an attempt to make extra cash. What does this mean in terms of your ability to take on a car loan, though?
Proving Your Income While Self-Employed or Freelancing
One of the cornerstones of getting approved for an auto loan is proving you have enough income to pay for the vehicle. With a W-2 income (when you work for someone else), this simply means having a recent check stub that proves a monthly income that meets the lender’s minimum requirement and shows your year-to-date income.
For people who are self-employed or freelancers, this means you have a 1099 income (when you work for yourself or you’re a contractor). Some lenders may not accept borrowers that are self-employed, and whether or not they do can depend on your credit score.
Borrowers who are self-employed may need to provide copies of their tax returns to prove their income. However, if you have good credit, a traditional car lender may not ask for these. They may only ask for bank statements or deposit slips as proof of income.
However, expect to need more if your credit is poor.
Requirements for Car Loans for Self Employed with Bad Credit
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 Car Loan Self-Employed & Subprime Lenders
For borrowers who are applying with a subprime auto lender for their next car loan due to a lower credit score, proof of income is a big factor. Subprime lenders look for stability in their borrowers outside of their credit score, and this means they typically verify work history and income to determine your ability to take on an auto loan.
If you’re self-employed or a freelancer with bad credit, then expect a subprime lender to ask for two or three years of your tax returns for proof that you can meet the income requirements. Your tax returns also prove that your income is taxed and reported.
Many people wonder if you can use bank statements to prove your income with a subprime lender. Unfortunately, bank statements don’t show that your income is reported, just that it’s deposited in your account, so subprime lenders almost always don't accept them as proof of income.
Your tax returns can also prove your work history since it can show a consistent source of income. Many subprime lenders look at your work history going back three years, and they usually require that you’ve been at your current job for at least six months to one year.
While subprime lenders have some stringent requirements for their car loans, it’s all in an effort to make sure that you have the ability, stability, and willingness to handle the loan. Their auto loans are also reported to the credit bureaus, which means there’s a chance for credit repair with timely payments.
If you can’t prove your income or work history with tax returns, then you may have to look into other car lending options.
Subprime Income Guidelines
Here is where it gets tricky: if you have bad credit and you don't have a pay stub, there is usually only one way you can prove to these lenders how much you make – and that's with the last two or three years of your tax returns.
As you know, you report self-employment income on a Schedule C and, after deducting for expenses, report your net income on your Form 1040 tax return. Importantly, it's this net income that subprime lenders will look at (and use to compute your debt-to-income and payment-to-income ratios) to see if you qualify for a car loan.
This means that if you've been deducting too many expenses or haven't reported all of your income, both these ratios could be off. In most cases, this means you won't get approved for a car 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 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.
Self-Employment and BHPH Dealerships
BHPH dealers have double roles since they’re also your lender. All the car shopping and financing are done at the same location, so it's a one-stop-shop experience. The biggest plus to these dealerships is that they usually aren’t concerned with what’s on your credit reports, so a lower credit score wouldn’t come in between you and a vehicle.
These dealers often aren’t as concerned about where your income is coming from, as long as you have enough to prove you can pay for the car. Since BHPH dealerships don’t have to rely on a third-party lender to approve you for financing, they tend to have their own means of verifying income.
Some requirements of a BHPH dealer usually include a down payment and some form of proof of income. On average, BHPH dealerships tend to assign higher than average interest rates on their auto loans, so it’s something to be mindful of. BHPH dealers may not report your car loan to the credit bureaus, so ask about their reporting practices if you’re concerned about credit repair.
Ready to Find a Dealership?
Finding the right lender for your income situation can be a struggle, especially when dealing with credit issues. However, locating the right lender doesn’t have to be a hassle, and we want to help.
Here at Auto Credit Express, we’ve produced a network of dealerships that spans across the country. We match bad credit borrowers to dealers that are signed up with lenders that work with unique credit situations. Get started right now by completing our free auto loan request form, and we’ll look for a dealership in your area without any obligation.