How To Get A Pay Stub for an Auto Loan?

If you’re considering applying for a car loan, there’s a lot of information you need to get together. 

One thing you’ll need to provide that’s very important to determine if you’re eligible for a car loan is a pay stub. What if you don't have pay stubs though? This article explains other documents you can use to prove income, why you need to prove your income, and what you need to do to get a car if you have bad credit. 

Also read: Required Information On A Pay Stub

Do You Need Pay Stubs for an Auto Loan?

You need to prove your income when you’re going to buy a car, but you don’t necessarily have to provide pay stubs. Some dealers prefer you give them pay stubs so they can see your gross income, but you can make a pay stub easily with a paycheck stub maker if you’re self-employed and don’t have an employer to provide one. 

There are other ways you can prove your income. If you’re self-employed, some companies require you to give them two years’ worth of tax returns. Their goal is to ensure that your business is stable, so you don’t get in over your head with an expensive loan. 

They may also ask to see a recent bank account statement to make sure you’re in the clear and can afford a payment. 

Also read: Employee’s Gross Pay

How Many Pay Stubs Do I Need for a Car Loan?

If you're applying for a car loan, you'll need your pay stubs for the last month. That means if you get paid twice a month, you'll need two pay stubs. If you get paid weekly, you'll need four pay stubs. They should snow your gross income for the period they cover.

Proving Other Types of Income

If you’re not employed or working as an independent contractor, there are other documents you can provide to prove other types of income. 

For example, if you receive child support, alimony, or government benefits like Social Security or permanent disability, you can provide a copy of an award letter that shows how much you're receiving and says you'll get the money during the whole loan term.

You also may be able to provide bank statements as proof of income if you don't have pay stubs.

Employment letters - Employment letters aren’t accepted as proof of income for a car loan, but if you have bad credit, you may have to provide verification of your employment along with proof of your income and driver's license.

What Is the Purpose of Proving My Income?

Using your income to prove your worth goes beyond repaying your loan. There are many expenses associated with owning a vehicle, and lenders consider them, along with your other monthly obligations, when considering your loan application. 

Your budget shouldn't be too tight when you apply for auto loans; otherwise, you could be disappointed. Lenders want to work with customers who will successfully pay back their loans because it costs them when customers default. 

The following two formulas are used by lenders to ensure your finances aren't overextended:

DTI (Debt to Income Ratio)

This tells the lender how much of your income is being used for payments. It includes estimates for your car and insurance payments. Lenders don't usually make loans to people with debt-to-income ratios over 45% to 50%. 

PTI Ratio (Payment to Income Ratio)

This indicates how much of your income will be used to pay back a given loan payment. By determining your PTI, you can estimate your budget's payment cap. Your payments, including the $100 estimated cost of auto insurance, are generally capped at 15% to 20% of your income. PTI however, should be as low as possible. 

Your borrowing power is directly related to your gross monthly income. The higher your income, the more you can potentially borrow, depending on your overall credit situation. 

Auto Loan Approval and Income

Your income can indeed affect your ability to repay an auto loan, but it can also affect your ability to qualify for one. When you have excellent credit, your income may not be as important in determining your auto loan qualification as it is when you have poor credit. 

1099 Income and Auto Loans

If you want to buy a car but only have 1099 income, can you still do it? Yes, but you’ll need to take a few steps to do it:

Get Copies of Your Tax Returns

If you don’t have a W-2, the lender will ask for tax returns for the past two years. Make sure you have the information available and organized. 

Also read: What is the Form W2?

Watch Your Deductions

If you’re self-employed, you know that you can use tax deductions in your favor. Unfortunately, deductions reduce your reported income and can affect your ability to get approved for a subprime auto loan. You can still benefit from tax deductions, but remember that affects your DTI as well as your income. 

In addition to bringing tax returns, you may need to bring copies of your bank statements that verify you receive 1099 income. However, they cannot cover the proof of income requirement on their own, regardless of how useful they are for verifying your income. 

The Best Way to Deal With Poor Credit

If you want to buy a car but have a bad credit history, or you’re self-employed, expect that you’ll have to make at least $1500 to $2500 a month before taxes from a single job to qualify. In addition, you may need proof of your residency, such as a driver's license, utility bill, and phone bill, so auto lenders can see your financial stability.  

How Can I Borrow Money for a Car if I Have a Bad Credit history?

If you have a bad credit history, you'll want to carefully consider your options. It might cost more to get a loan. Credit scores help auto lenders determine how likely it is that you will repay them - the lower your credit score, the greater the risk. Lenders typically charge higher interest rates to compensate for this risk. 

For example, according to a report from Experian, a subprime borrower who had a credit score between 501 and 600 was given an 11.33 percent interest rate to finance a new car and 17.78 percent to finance a used one. By comparison, the Federal Reserve says the average interest rate for a 60-month new car loan was 5.14 percent during that time. 

How To Get a Car Financed When You Have Poor Credit

There are a few steps you can take to get car financing with poor credit.

Obtain a Credit Report

Make sure your credit is in good standing before you start the car loan application process. Verify all information on your credit report is accurate and dispute any errors. Inaccurate information may hurt credit scores, making qualifying for a loan more difficult. 

Knowing your credit scores also helps you set realistic goals when applying for a loan. Credit Karma offers free access to credit reports on Equifax and Transunion, or you can visit annualcreditreport.com for one free report per year from each bureau.

Take Some Time to Build Your Credit 

You might be eligible for lower interest rates, which could result in significant savings on your auto loan. If you cannot wait, you could ask a close friend or family member to co-sign with you. If you have a co-signer who has excellent credit, it may improve your loan approval or may help you get a better interest rate and terms. 

If someone agrees to co-sign for you, they'll have to bring proof of employment and bank statements to show they're financially responsible.

Put Away Money for the Down Payment.

There are several benefits to having a down payment saved up. If you have bad credit, having money down may make it easier for you to obtain an auto loan. A lender may lose money if there is no down payment, so they may have to take your vehicle if you fail to repay the loan. Lenders may even insist that you put something down.

Down payment will also save you money on interest. A larger down payment means you'll need less money to buy the car. Therefore, you will pay less interest when you have a smaller balance, which lowers your total debt.

Down payment may also lower your interest rate. Your interest rate is determined by the loan amount and the vehicle's value.

Obtain a Secured Credit Card

If you have poor credit, you should get a secured credit card to improve your credit. A secured credit card is secured by the amount of money you put on it; you can only use that money as a deposit. A secured credit card will allow you to get used to using a credit card and will build your credit history

Decide How Much You Are Willing to Spend

When you determine the amount you can borrow, consider more than just your monthly loan payment. Budget for the costs associated with owning a vehicle. 

In exchange for a lower monthly payment, you might be tempted to extend the loan term. If you do take out a longer-term loan, you may pay more interest, and you may find yourself in debt, which can present some difficulties when you decide to sell or trade in your car. 

Calculating the amount of interest you'll pay on a car loan is easy with an auto loan calculator. 

Compare Loan Terms and Rates from Multiple Lenders

Finding the best loan for your budget and needs can be accomplished by comparing rates and loan terms from different lenders. Consider the following options if your credit is bad:

Your Financial Institution

This can be a good place to begin if you currently have an account there.

Online Loan Providers

These companies specialize in providing loans to those who have bad credit. Online prequalification may also be available. The estimated interest rate and terms will be available to you if you're pre-qualified. Just remember that getting prequalified doesn’t ensure approval for the loan amount you estimate. 

Automobile Dealerships

Dealerships usually do business with a variety of financial institutions. This means it is possible to get financing with one of their lenders. Some dealerships have dedicated departments to help people with bad credit get financing.

A Purchase-here-pay-here Dealer

In the event you aren't able to get a car loan elsewhere and you need one, this kind of dealer may be able to help. You should use them only if you have no other options. 

These dealerships don’t check credit, but they charge more interest than other financial institutions do - they’re usually around 20%. They may not ask for proof of income, but you'll probably still have to show them your driver's license to prove your identity.

In addition, buy-here, pay-here lenders may take extra measures to ensure they get their money, such as installing a tracking device on the car so they can repossess it easily if you stop making payments, or prevent it from starting. 

Pay-here, buy-here loans often come with inconvenient payment schedules as well. You may end up making weekly or biweekly payments rather than monthly ones. You won't have many options for paying since the payment goes directly to the dealer instead of a bank.  

It's a smart idea to shop around for rates during the same time frame to minimize the impact on your credit. FICO considers multiple inquiries of the same kind within 45 days to be one inquiry. VantageScore considers multiple inquiries made within 14 days as one inquiry. 

Can a Credit Score of 500 Get a Car Loan? 

Even with a 500 credit score, you can borrow money for a car, but you'll have to pay a lot. Based on the Experian State of the Automotive Finance Market, loan rates for people who had scores of 500 and below were 13.97 percent for new cars and 20.67 percent for used cars in the second quarter of 2020. 

There is a significant difference between those who have a credit score of 661 to 770, considered to be prime - they paid on average 4.21 percent for new car loans and 6.05 percent for used car loans.

Very few people with credit scores of 500 qualify for car loans. According to Experian data, only 0.37 percent of loans for new cars and 4.35 percent of loans for used cars during the fourth quarter of 2019 were made to borrowers with credit scores below 500. 

Also read: Create Your Own Pay Stub Template

Wrapping Up

That’s what you need to know about how to get a pay stub for a car loan. As you get the paperwork together that you need to apply for a car loan, look at your credit score, what kind of work you do or have done in the past, and if you have any money saved for a downpayment. 

If you have bad credit, look at all the possible options for places you can go to get a car loan,and choose the best one for you based on the amount of money you have to put down and how much you can afford for a monthly payment. 

Also read: Sanctions For Falsifying Pay Stubs