• Tweet

• Tweet

Self-employed individuals with poor credit must be careful to report income in a proper manner or they may not qualify for bad credit auto financing. If they do not properly report earnings, they may be forced to purchase a vehicle from a buy here, pay here dealer and end up in repossession.

While proof of income may not be a factor with regular auto loans, it is with bad credit auto financing.

Those who are self-employed report their business profit or loss on the IRS Form 1040 Schedule C document. Based on the nature of the business, some income may not be reported. This may save the filer money by reducing income taxes but it can also prevent the person from being approved for a loan, especially if the FICO score falls under 640.

Lenders offering poor credit auto loans require self-employed individuals to provide proof of income. The only real way to do so is by presenting a tax return prepared by a professional. Even bank records are not enough to provide proof of income because they do not verify that earnings were reported to the IRS.

Subprime lenders usually have a minimum requirement for monthly income raging from $1,500 to $1,800. This is used to calculate a debt-to-income ratio that allows them to establish a car payment budget.

However, even if a reported net profit meets lender requirements, monthly expenses could be out of proportion with stated income, causing the individual to fail to qualify for the loan.

Someone who is self-employed must consider not only the amount of net income reported but also how this income affects the debt-to-income ratio. If the income tax return does not reflect enough income or if monthly debts are disproportionate to this income, a lender may not approve the bad credit auto loan application.

For a company that requires automobile use, this can seriously affect business success.