How get an auto loan when you’re self-employed


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Ask a Lender
December 7, 2017


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Key Points

Self-employed? Here’s what you need for an auto loan

  • These loans are more commonly available through specialty finance companies.
  • Provide proof of income through tax forms and bank statements.
  • Child support or disability benefits can be alternative income sources.
  • Have a minimum income of $1,500 to $1,800 a month.
  • Have a debt-to-income (DTI) ratio lower than 50 percent.

If your primary income is derived from owning a business, or working as an independent contractor or freelancer, you may have experienced difficulties when filing taxes or attempting to borrow money.

For many people, being self-employed means freedom and flexibility, but it can also create a few questions around finances. If you’re self-employed and in need of an auto loan, you may have been turned down for traditional financing. Here are a few tips for obtaining an auto loan when you’re self-employed, including those with subpar credit or trouble providing proof of income.

Documentation

Even if you’re self-employed and have some financial blemishes, such as a subprime credit score or personal bankruptcy, you can obtain an auto loan. They are typically available through alternative, specialty finance companies. Although these companies may not work directly with the public, many car dealerships will connect you to them to secure financing for an auto purchase.

The auto-loan application process is different for a self-employed individual than it is for a traditional employee who uses a W2 form to file their federal taxes. Independent contractors receive a 1099 form to report their income. Many small-business owners use a Schedule C attachment with their personal tax return, or an 1120 or 1120S form if they are structured as a C or S corporation, respectively.

Provide the appropriate tax forms for the past two years to three years, as well as several monthly bank statements, as specialty lenders will want evidence of steady income. Lenders typically require a minimum monthly income of $1,500 to $1,800 to qualify, as well as a debt-to-income (DTI) ratio below 50 percent. Debts that factor into the DTI equation may include mortgage or rent payments, credit cards and student loans.

Small-business owners should be aware that claiming too many deductions for their business may significantly lower their net income and disqualify them from financing.  

Lenders will want other documentation as well, including proof of residence, which can be provided with a utility or phone bill. If you own a home, provide a mortgage statement. If you rent, provide a lease agreement with contact information for your landlord, so the lender can verify you have a stable living situation. Many lenders will also require five to 10 personal or professional references.

Income verification

Having a subprime credit score of 620 or lower may not disqualify you from an auto loan through a specialty lender. But having too little income or too much debt can.

And you should be prepared to pay a higher interest rate if your credit score is low. First-quarter 2017 numbers from Experian, a major credit-reporting agency, showed that auto-loan borrowers with a score between 601 and 660 paid an average interest rate of 9.88 percent, compared to an average rate of 5.29 percent for borrowers with credit scores between 661 and 780. That equates to additional interest of about $2,100 on a five-year, $16,000 loan.

Self-employed individuals may have other sources of income. This can include child support or alimony payments, or retirement or disability benefits. Child support is a common way of boosting income to qualify for an auto loan. Provide a copy of your court-ordered child support that details the amount, frequency and duration of the payments.

Conversely, borrowers who are delinquent with child-support payments may not qualify for an auto loan. Lenders view this as additional risk, since they may default on their auto loan if a court garnishes their wages.

Benefits may also help a self-employed person qualify for an auto loan, even if they have credit problems, as creditors are limited in what they may garnish. Direct-deposit payments from the Social Security Administration, U.S. Department of Veterans Affairs, Federal Railroad Administration, Civil Service Retirement System and Federal Employee Retirement System have a two-month protection period, according to the Consumer Financial Protection Bureau.

For example, if you receive $1,000 a month in Social Security benefits, a creditor can’t touch two months of payments, or $2,000, although anything left in your bank account beyond that amount may be garnished.


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