How Do Banks Verify Income For An Auto Loan?
If you are in the market for a new car, you may be considering applying for an auto loan. Not everyone understands how auto loans work, including how banks verify income for an auto loan.
If you have a less than impressive credit score, your income is the first thing that banks look at when they consider your application for an auto loan. Understanding the process can help you prepare your loan application and avoid delays in approval.
Why You Need Proof of Income
When applying for a loan, banks don’t necessarily need proof of income to approve your application. When applying for an auto loan, banks general look at three factors:
- Credit score
- Down payment
- Debt-to-income ratio
If a customer with bad credit applies for a loan, lenders commonly request proof of income and employment information to ensure that the customer can afford to make the car payments on time and not default. If you have an excellent credit score, or a substantial down payment, or both, then a bank will most likely not require income verification as both of those factors lower the lender’s risk.
When assessing your income, the lender considers your debt-to-income ratio. Your debt to income ratio is the amount of debt you carry compared to your income. This debt may include a mortgage, student loans, or even another car loan. Typically, a good debt-to-income ratio proves that you have enough income to cover your existing debt as well as the new car loan.
There is usually a limit on how much total debt you can carry in the eyes of lenders, and the maximum debt-to-income ratio that banks accept can vary. However, for auto loans, lenders usually prefer a debt-to-income ratio below 36%.
The minimum income necessary to qualify for an auto loan may vary, but most lenders prefer an applicant to have at least $1,500 to $2,000 in monthly income before taxes. In this case, someone with an income of $1,500 would not qualify for an auto loan if their total debt, including the new auto loan, exceeds $540 monthly.
What You Need to Verify Income for an Auto Loan
To verify your income for an auto loan, you may only need to provide your lender with your latest W-2 or one or two recent pay stubs. Be aware that lenders may call your employer to verify that you are currently employed with them. In this case, it may also be helpful to provide a copy of your employment agreement.
If you are a contractor or freelancer, you will have to provide a copy of Schedule C from your tax return.
If you receive income from other sources, like government assistance, you will have to present a monthly income statement.
How Banks Verify Income for Auto Loans
When it comes to how lenders verify income for car loans, the source of income may matter.
Traditional Employment
If you are an employee with a company and receive a W-2 every year, the loan approval process is usually quick and smooth, as long as you make the minimum income requirement. Banks may ask to see as many as your last three pay stubs to verify your income, whether you work full-time or part-time. If you have several part-time jobs, be sure to bring in pay stubs from each job.
Occasionally, banks may contact your employer themselves to verify your income and employment status, which would speed up the loan approval. You may want to let your employer know that they should expect a call verifying your employment.
Self-Employed
If you’re self-employed, the process may be a little more complicated. You must provide the most recent copy of your Schedule C. The higher your business income, the more likely you are to pass the income verification for an auto loan.
Income verification can take longer if you’re self-employed, as banks usually have to verify your documents. To avoid delays, you may want to consider seeking a pre-approval before walking into the dealership.
Some lenders may provide no-verification loans, but these loans often come with a higher interest rate–upwards of 10%, or additional fees to compensate lenders for the increased risk associated with not verifying your income. Therefore, we recommend that you avoid these loans and stick with traditional ones. The best way for self-employed applicants to avoid delays is to apply with a great credit score or a large down payment that may allow you to skip income verification.
Unemployed
If you’re unemployed, you may still qualify for a car loan, although it is more challenging. Lenders may request additional documents related to your income streams. For example, if you are retired, you may be required to show copies of your Social Security statements, 1099-Rs, as well as your most recent tax return.
If you are not retired but unemployed, lenders may see you as even more high risk as they don’t know what would happen if unemployment insurance runs out before you find a new job. In this case, it may be best to find someone to cosign the auto loan for you to get approved.
When You Don’t Need to Verify Income for an Auto Loan
You may not need to verify your income for a car loan if:
- You have a great credit score
- You have a substantial down payment
- You have been working at the same job for years
- You are applying for the loan a the same financial institution that your paycheck gets deposited to
Being Prepared to Apply for a Car Loan
Applying for an auto loan can be a long process with unexpected obstacles. Understanding what lenders look for when approving applicants can give you an idea of what to expect and help you get the relevant information together. If you know that your credit score isn’t great, or if you’re self-employed, having your income verification documents ready before applying for a car loan may speed up the application process and put you in your new vehicle that much sooner.
Form Pros can quickly help you prepare your tax forms such as your W-2 and pay stubs to save you time and ensure that you have everything you need to get approved for your auto loan. Try using Form Pros today!