Financing a Car When You're Self-employed

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


, - November 20, 2018

You can still get a car loan if you’re an independent contractor and have bad credit. But, because you’re a 1099 employee, you need to bring in additional documents to complete your auto loan application and prove that you meet the lender’s income requirements.

Income Requirements for Subprime Lending

Subprime lenders work a little differently than traditional lenders. Instead of placing a heavy emphasis on your credit score, they look at other factors, like your income, to determine if you qualify. When you get financed through one of these lenders, they typically have three income requirements you need to meet:

  1. Minimum income amount – Although income requirements vary by lender, they typically ask you to have a minimum documented income of $1,500 to $2,000 a month, before taxes, from a single source.
  2. Debt to income ratio – Your debt to income ratio (DTI) should be no more than 45 to 50 percent of pre-tax income (including a car and auto insurance payment). Lenders calculate DTI by dividing your monthly bills by your monthly income.
  3. Payment to income ratio – Lenders calculate your payment to income (PTI) ratio by dividing the car payment by your monthly income. Your PTI should be no more than 15 to 20 percent of your pre-tax income.

These income requirements can affect you if you’re self-employed, because it makes it more difficult for the lender to determine your income and accurately calculate DTI and PTI ratios.

Proving Income when Self-employed

Before you head to a dealership, make sure you calculate these ratios. Once you have all your numbers ready, it’s time to start the car buying process. In order to make it easier for a lender to verify your income, you need to do these two things:

  1. Get copies of tax returns – If you don’t have a W-2, the lender is going to ask to see at least two years of tax returns to verify your income. Make sure you have this information available and organized.
  2. Watch your deductions – If you’re self-employed, you know that you can utilize tax deductions in your favor. Unfortunately, what you deduct reduces your reported income, and can affect your ability to get approved for a subprime auto loan. You can still benefit from tax deductions, but keep in mind that they not only reduce your income, but could also affect your DTI.

In addition to bringing in your tax returns, you may need to bring in copies of your bank statements that verify you receive 1099 income. Although great for verifying your income claim, your bank statements alone aren’t going to cover the proof of income requirement.

Ready to Finance a Car?

When you have bad credit, it can be tough to find financing. It can be even more difficult if you’re self-employed. If you need to finance a vehicle, but worry you can’t get approved, let CarsDirect help.

We work with a nationwide network of special finance dealerships that have the lending resources to help get credit-challenged buyers the financing they need. Forget about the stress of going from dealer to dealer being turned down. Simply fill out our free and easy car loan request form and we'll get to work matching you with a dealership in your area!

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


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