When trying to finance the purchase of a car, proof of income is required for approval by nearly every financing company, both in-house with the dealership and through outside lenders. Proving income becomes even more important when an applicant’s credit score is lower than ideal. Be prepared to prove your income if you have bad credit and want to buy a car.
Unreported Income
The primary documents that are used to prove income are tax records like W-2 and 1099 income reports and pay stubs that detail income and tax contributions. Anyone who does not report their “under the table” cash income on their tax returns will be unable to provide proof of their unreported income. Unless you have perfect credit and a lot of available money to spend, an inability to prove cash income can make financing the purchase of a car nearly impossible.
Bad Credit and Proof of Income
The reason proof of income is so important to lenders offering car financing to those with bad credit is because it demonstrates an ability to keep up with monthly payment requirements. Applicants need to prove that the proposed monthly car loan payment is below a certain percentage of their monthly income, usually around 30 percent. Car dealerships that provide in-house financing to "high-risk" applicants, such as those with bad or no credit history, want to be sure you can meet the necessary payment requirements before they approve a car loan application.
Proving Cash Income
The only way to provide proof of a cash income, which is any wages that do not come with official pay stubs, is by reporting the income on annual tax returns. Employers are generally required to provide a tax form 1099-MISC for any and all cash payments made to independent contractors and “casual” workers. In the event you do not receive this form from an employer who pays you in cash, you can and should still report the income within your Schedule C income tax return filing.
Stay Organized
Anyone with bad credit who attempts to finance the purchase of a car has to be sure that their proof of income documentation is both well-organized and complete. Failure to gather proof of all income sources could result in a high-risk loan application being denied.
Proof of income is required by most in-house dealership financing applications as a way of showing the lenders that you can keep up with payments. Be prepared and always report your cash income in order to prove you earn enough.
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