How being your own boss can affect the odds of qualifying for an auto loan with questionable credit
What we know

Car buyers with problem credit that are self employed should be aware of the problems they may encounter when applying for a car loan.

At Auto Credit Express we've found that this type of income can often prove to be a major stumbling. We know this because for the past twenty years we've been helping consumers searching for online auto loans find those dealers that can offer them their best opportunities for auto loan approvals.

But even the most experienced special finance managers often cannot get applicants approved if they're self-employed.

Income issues

It's unfortunate but in many cases a BHPH dealer is the only choice for consumers with problem credit who are self employed that are. For the most part this is due to the fact that these people fail to disclose all their income when it comes time to prepare their taxes.

We understand why they do this. If only a portion of their income is reported, it can reduce the amount of income tax they're required to pay. But doing this can also prevent them from getting approved for a car loan - especially true if their FICO scores are below 640.

Here is why this happens:

Verifying income

While most banks and credit unions don't require applicants to prove how much they earn, this isn't the case with most higher-risk auto lenders. As a rule, these financial institutions specify that an applicant's income must be verified with either a W-2 wage statement or, in the case of people who are self-employed, by providing up to three years of professionally prepared tax returns.

This means that in the case of self-employed applicants, if the required income isn't listed on these tax returns there is no proof - even with supporting bank records.

How this affects other requirements

Most subprime lenders have minimum income requirements. The income that can be verified with wage statements or tax returns is used to qualify an applicant for a loan as well as compute a debt-to-income (DTI) ratio as well as the budget range for an auto loan and the monthly car payment. This process affects 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 applicants this means reporting a minimum yearly net profit (after expenses) of anywhere from $18,000 to $21,600.

• Even if the minimum income threshold is met there is always the possibility that an applicant's monthly expenses could be out of proportion. Here's an example: if the reported income is $2,000 per month but actual income is closer to $3,500, reasonable monthly expenses could be close to $1800. So while the actual debt to income (DTI) ratio is fine, the DTI ratio after substituting the reported income is not. In this case the loan application would be turned down.

The Bottom Line

In many cases applicants that have less than perfect credit who are self employed end up being denied credit from a high-risk lender because they fail to report all their income on their tax returns. This can happen if the income they report doesn't meet the lenders minimum requirements or if this causes an unacceptably high debt to income ratio.

One more thing to remember: Auto Credit Express specializes in helping applicants with car credit issues locate those dealers that can give them their best chances for approved auto loans.

So if you're ready to reestablish your auto credit, you can begin now by filling out our online auto loan application.