Why Unreported Wages Could Derail Your Auto Financing Dreams

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - February 22, 2018

As a potential bad credit car buyer, it’s vital to report all wages – especially if tips make up the majority of pay. Otherwise, potential borrowers may have trouble qualifying for auto financing.

Tipped Workers and Bad Credit Car Loans

Tipped employees, like restaurant servers, bartenders, and valets often receive a cash wage much lower than other employees. In fact, the federal minimum cash wage for waiters and waitresses is just $2.13 an hour. Tips are meant to account for the rest of the worker’s income. Often, the majority of cash tips go unreported. Workers may believe they’re saving money by not being taxed. Unfortunately, this is far from the truth. Unreported tips can affect a person’s ability to qualify for loans and credit.

If a borrower needs to get bad credit auto financing, they’ll most likely need a subprime lender. Not all lenders work with borrowers with poor credit, so it’s important to find a special finance dealer that has them available. These lenders look beyond credit to approve loans, and one thing they focus on is verifiable income.

Though this varies, subprime lenders typically require a minimum of $1,500 to $2,000 in gross monthly income. A borrower must also be able to prove their income with recent computer-generated check stubs from a single employer and possibly their form 1040 tax return. Tipped workers may have trouble qualifying if their employer only reports $2.13 in hourly wages.

Using a simple formula for calculating gross monthly income – hourly wage multiplied by number of hours worked per week multiplied by 4.33 – a tipped employee can see if their reported income meets qualifications.

For example: A restaurant employee works 40 hours a week at $2.13 per hour. Their employer only reports their credit card tips, which average $180 a week. By these numbers, this tipped employee brings home $1,148 of verifiable gross monthly income – well below most lenders’ required minimum income.

Unreported Wages Can Raise DTI

Tipped workers also suffer as potential bad credit borrowers by having a debt-to-income (DTI) ratio that’s too high for lender approval. DTI measures the amount of a borrower’s income used by their monthly bills. Lenders usually cap this at 50 percent, which means that all a borrower’s monthly bills, including car and insurance payments, can’t exceed half of their monthly income.

A tipped worker may be able to comfortably afford their bills and payments with all their income, but a lender won’t add in unreported tips when calculating their DTI. To find DTI, add up monthly bills such as revolving and installment credit payments, rent or mortgage, and car insurance. Divide the total by monthly gross income.

For example: A tipped employee lives comfortably on $52,752 a year, but $38,976 of their income is cash tips, which they don’t claim. This leaves them only $13,776 of reported income and $1,148 a month. With $700 for rent and other bills, plus $450 for a car and insurance payment, this borrower has a DTI of over 100 percent.

Serious Consequences for Unreported Tips

Not only will a borrower’s ability to get credit be affected by not reporting tips, but wages which go unreported have negative effects if a worker gets audited. The penalty for tax fraud, which is what unreported wages are, can be very high – up to $250,000 and/or up to five years in prison, depending on conviction.

Bottom Line

When it comes to being a tipped employee, make sure to always report the full amount of your income, so you don’t leave yourself stranded when you need to finance a car. If you’re ready to get your next vehicle but credit issues have got you down, let CarsDirect point you in the right direction. We work with a large network of special finance dealers that have lending resources available to help. Get on the right path by filling out our simple online auto loan request form today!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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