If you are shopping around for a new car, you may find it helpful to know when and why auto lenders verify income and employment.
Your bank, credit union, car dealer, or finance company may contact your employer and or ask for proof of income documentation for marginal applications – if they cannot do so electronically via an outside service.
Drivers falling into the marginal category have a combination of lower credit scores, smaller down payments, and less affordable debt-to-income ratios given the price of the vehicle.
Know what to expect and prepare the appropriate documentation. Readiness increases your chances of buying the car you want at a decent interest rate.
Do Car Finance Companies Contact Employers?
Asking what circumstances might prompt a car dealer, finance company, or bank to contact your employer to verify employment is a much better question that brings you closer to a real-life answer you can trust.
Most dealers do not underwrite auto loans, but finance companies do. They might call your employer if they cannot verify employment electronically, and your credentials fall into the middle ground.
Do car dealerships call your employer to verify employment? Most dealers refer customers to third-party companies, so the direct answer is no in most cases. The third-party handles verifications rather than the dealer.
If your job situation and borrowing credentials are on shaky ground, waiting until the last second to arrange a loan (after picking out a new car at the dealer) is not a great idea.
Instead, you might want to clear up matters before walking into the showroom and know the exact price of the vehicle you can afford.
Banks and auto financing companies are most likely to contact the employers of marginal applicants – whose employment they cannot verify electronically and whose credentials fall into a middle ground.
Many lenders make automated underwriting decisions using software systems without verifying employment.
- Instant approvals have stellar credit scores, large down payments, and an affordable debt-to-income ratio based on the vehicle price
- Instant declinations have a bad credit history with no down payment and a debt-to-income ratio that is way too high given the vehicle price
Marginal applicants fall into the middle ground and typically require manual underwriting review, including verification of income and employment before the lender can decide to approve or decline.
Banks and auto finance companies frequently utilize electronic verifications to confirm employment rather than phone calls – if they can find a record. This method relies on a database of pre-published employment information.
The process is speedy, reliable, and discreet – if your employer shares data with industry providers. Typically, large corporations participate while small businesses do not.
- The Work Number © touts a file consisting of over 115 million active records to check applicant-provided information
- Truework © provides a similar offering to help companies streamline their employment verification processes
How Do Banks Verify Income for Auto Loans?
Banks and finance companies verify income for auto loans for marginal applicants by reviewing proof of earnings documents provided by the individual.
Lenders might look at offer letters, recent paystubs, tax returns, W2 forms, and bank statements but rarely consider sources that legally bar wage garnishment.
The bank or finance company may not accept certain documents as proof of income for a car loan when laws bar them from garnishing the source of financial support.
Wage garnishment might come into play if you have a remaining balance after the lender repossesses your vehicle and sells it at auction.
- SSI and SSDI recipients who rely on Social Security Disability payments
- Single mothers receiving alimony and child support
- Unemployed workers depending on temporary government benefits
Banks and finance companies might consider an offer letter as proof of income for a car loan if your other credentials are reasonable: good credit score, sizable down payment, and affordable debt-to-income ratio given the vehicle price.
However, an offer letter is not a strong as other forms of documentation such as recent paystubs, making it slightly more challenging to get a car loan when starting a new job.
Many employers use probationary periods when hiring new workers, and approximately 20% do not continue. Therefore, the offer letter carries less weight than other documents that demonstrate longevity.
The bank or finance company prefers to see your last paystub as proof of income for an auto loan. The document shows the year-to-date earnings, along with deductions for taxes, health insurance, 401K contributions, state unemployment, etc.
Your recent paystub provides a snapshot of your disposable income, the money you have available to spend. The stub comes attached to your paycheck each period, so be careful to file it in a safe place rather than tossing it in the trash.
People who have their paychecks direct deposited might receive paper paystubs in the mail, or you might be able to log into a web portal to download a digital copy.
The bank or finance company might accept a W2 form as proof of income for a car loan. Your employer issues a W2 form in late January of every year, which shows gross earnings along with deductions for taxes, health insurance, 401K contributions, state unemployment, etc.
A W2 provides reliable earnings documentation early in the year (January and February). However, its value diminishes in later months because the information grows stale.
A recent paystub is more effective than a W2 because it demonstrates that you still have a job. Expect calls to your employer if this is the only document you can provide.
The bank or finance company may require copies of recent tax returns as proof of income for a car loan. Expect to provide this documentation if you are self-employed or work as an independent contractor or 1099 employee.
In this case, the bank needs to determine your net compensation after business expenses, so a 1099 statement by itself is insufficient. The lender will require a copy of Schedule C business expenses.
You may need to complete IRS Form 4506-T (Request for Transcript of the tax return). The IRS then sends the tax return information directly to the lender for evaluation.
The bank or finance company may also require copies of recent bank statements as proof of income for an auto loan. Expect this request if you are applying later in the year as a self-employed individual or independent contractor.
The information from your tax return grows stale very quickly as it summaries the earnings from the prior calendar year. Small business fortunes can change overnight. Therefore, copies of recent bank statements can show that your enterprise remains viable in April, August, or November.