When you're looking for auto financing with bad credit, there are certain requirements that have to be met, including minimum income requirements. Though the specific requirements vary by lender, some factors are standard, such as the type of income you need to qualify for a car loan.
Types of Income
There are two types of income that people generally receive: earned income and unearned income. Earned income comes from sources like hourly wages, commissions, salaries, and tips. These are payments for specific work, and are typically taxed. The way in which you earn income determines how this income is taxed.
For instance, if you're an hourly or salaried employee, your taxes are taken from your checks by your employer and you get a yearly W-2 tax form. If you're an independent contractor, you're responsible for paying your own taxes, usually on a quarterly schedule, and most likely receive one or more 1099-misc forms from business you perform work for. If you’re a business owner, you won’t always receive 1099 forms, but, like independent contractors, you report your income on Schedule C of the 1040 individual income tax return form.
On the other hand, unearned income can come from a wide range of sources. Most unearned income is taxable, although it may be taxed differently than earned income depending on the type of unearned income it is. There's a long list of sources of unearned income a person could have, including:
- Child Support
- Social Security
- Social Security Disability
- Rental Income
- Workers Compensation
- Pension or Retirements Plans
- State Public Assistance (varies by state)
The major difference between earned and unearned income is that earned income is garnishable, which means it can be seized by court order to settle consumer debts, while unearned income typically isn't.
Why Income Matters in Auto Financing
It's important to know where your income comes from and whether or not it can be garnished because typically only garnishable income is considered by lenders when you apply for a bad credit auto loan.
Besides being garnishable, lenders usually require a minimum income of between $1,500 and $2,000 a month before taxes from a single source. If you meet this requirement, any additional income, including unearned income, can be included when lenders are calculating your debt to income (DTI) ratio.
Your DTI is used to help lenders see if you have enough available income to comfortably afford a car loan. It's calculated by adding up all your bills, including an estimated auto loan and insurance payment, and dividing that amount by your total pre-tax monthly income. If your total payments amount to less than 50% of your income, you're typically able to get approved if you meet the other requirements.
What happens if you don't meet the lender’s minimum income requirements with garnishable income, or if all your income is unearned? Don't worry; you're not out of luck financing a vehicle.
Getting a Car with Unearned Income
In order to qualify for a car loan with a subprime lender when your primary source of income is unearned and cannot be garnished, you're going to need a bit of help. The easiest way is to add a co-borrower to your loan.
A co-borrower is someone that signs the loan documents with you and helps you qualify for a loan by adding their income to yours. However, incomes can only be combined if the co-borrower is your spouse. By signing the loan, co-borrowers also share ownership of the vehicle and are listed on the title along with you.
If getting a co-borrower isn't something you can do, your final auto financing option lies with buy here pay here dealerships. These dealers are also lenders, and don't care about where your income comes from as long as you meet the income and down payment requirements.
Finally, if financing options don't seem to work, you could buy an affordable car outright. This means finding the vehicle you're looking for either at a car lot or through a private sale, and paying for it in cash.
Visiting the Right Dealership
It's difficult to get the auto loan you need when you don't have garnishable income, but not impossible. Now that you know the difference between earned and unearned income, and how it affects your ability to get a car loan with bad credit, you need to find the right dealership for your situation.
Not all dealers work with lenders that can help people who struggle with credit. Those that do are called special finance dealerships, and here at The Car Connection, we work with a nationwide network of them. To get connected to a dealer in your area, simply fill out our fast, hassle-free auto loan request form.