Why It's Hard for Self-Employed Workers to Get Subprime Auto Financing

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Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


, Contributing Writer - February 2, 2018

Self-employed individuals can have a tough time qualifying for bad credit car loans because of subprime lenders' strict income requirements and verification processes.

Subprime Auto Lender Income Requirements and Verification

Subprime lenders typically have three main income requirements:

  • Minimum Income: The standard for qualifying is usually a minimum of $1,500 to $2,000 a month of gross, earned, W2 income from a single source. Subprime lenders verify income by asking for recent pay stubs or professionally prepared tax returns. Bank statements can never serve as proof of income.
  • Debt-to-Income Ratio: Subprime lenders use the debt-to-income (DTI) ratio to get a sense of an applicant's disposable income. The maximum DTI accepted is typically around 45 to 50 percent of pre-tax income. Lenders find DTI by dividing reported monthly income by monthly bills.
  • Payment-to-Income Ratio: Subprime lenders also estimate a car and insurance payment and divide it by an applicant's monthly income to find the payment-to-income (PTI) ratio. Bad credit lenders generally don't accept a PTI ratio over 15 to 20 percent.

Why This Affects Self-Employed Individuals

Subprime lender requirements and verification rules can affect self-employed workers' ability to qualify.

Issues with Proof of Income: Lenders need applicants consistently reporting a qualifying income, which is why they'll ask for two or three years of professionally prepared tax returns as proof of income. This can be an issue, however, because self-employed individuals often fail to disclose their true income levels or take advantage of tax deductions to save on taxes. Lenders will only use reported net income (amount left after deducting expenses) when qualifying applicants, so there's no proof if applicants report income incorrectly.

DTI and PTI Problems: Even if a borrower reports an acceptable minimum income level, they could fail to meet the DTI standards. If a borrower isn't accurately reporting their income, it could look like they're living beyond their means. For example, let's say a self-employed individual reported earnings of $2,000 a month, but their actual income is closer to $2,800. If their monthly bills added up to $1,200, they may be living comfortably, but their DTI ratio would be way off in the eyes of a lender. This same problem can arise when lenders compute the PTI ratio.

Crafting a Car Buying Solution

Self-employed workers with bad credit can struggle to get approved for a car loan if they aren't accurately reporting their income, which is something to keep in mind as Americans gear up to file their tax returns.

If you're dealing with less than perfect credit and need a car loan, CarsDirect may be able to help. We match consumers with local car dealerships that are equipped to handle unique credit situations. Take the first step toward your next vehicle by filling out our free and secure auto loan request form online.

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, Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


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