Whether you’re self-employed or a 1099 employee, you can still get an auto loan. But because you aren’t a regular W-2 employee, auto lenders want to see some extra documents to prove that you’re able to afford a car loan.
How Can I Purchase a Car Being Self-employed?
If you have bad credit and are self-employed, you need to provide proof of income in order to get approved for financing. Lenders typically look at three things: a minimum pre-tax monthly income of $1,500 to $2,000 from a single source, a debt to income ratio of no more than 45 to 50 percent (including a car and insurance payment), and a payment to income ratio of no more than 15 to 20 percent.
To verify income, lenders usually look at a recent pay stub that lists your year-to-date earnings. But because you’re not a W-2 employee, you need to bring in copies of your tax returns to fulfill the income requirement. Make sure you bring in at least your past two tax returns to verify your income. Depending on the lender and their requirements, they may ask for tax returns going back another year as well other documents, such as bank statements, to verify you have the cash flow to pay for an auto loan.
One thing to keep in mind when calculating your income amount is to watch your deductions. Your business expense deductions aren’t taxable income, and lenders treat your net profit, after deductions, on your Schedule C, as your gross income to qualify you for a loan.
Where to Finance a Car when Self-employed
If you have good credit and are self-employed, you don’t always need to provide proof of income and can finance through a traditional lender. If you have bad credit, however, you have some options to consider when it comes to auto financing.
The best place to apply for car financing when you have bad credit is with a subprime lender. Subprime lenders specialize in providing auto loans to car buyers with unique credit situations, and they can help you rebuild your credit with an auto loan, since they report loans and payments to the credit bureaus.
If you’ve been turned down for a car loan through a subprime lender, your next stop should be a buy here pay here (BHPH) dealership. BHPH dealers are in-house lenders, so you can sign and drive all in one place, often on the same day. BHPH dealerships are great for fast financing, and they don’t look at your credit score to determine approval, as it’s based on your income. Because they don’t check your credit, most don’t report loans or on-time payments to the credit bureaus. This means your credit score probably isn’t going to improve when you take out one of these car loans.
Keep in mind that the type of vehicles on these lots are generally older and come with high mileage. Don’t expect to finance the car of your dreams with a BHPH dealer.
Looking to Get a Car Loan?
Even if you’re an independent contractor or self-employed, you can still get approved for a car loan in many cases. If you have bad credit, you may be wondering if there’s a lender out there willing to help you get financed. If you need help searching for the right lender, let The Car Connection help.
We work with a nationwide network of special finance dealerships that have the lending resources you need. Getting the process started is easy. Simply fill out our no-obligation auto loan request form today, and we’ll get to work matching you with a local dealer.