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 want to substantiate both income and employment for marginal applications. Marginal applications have a combination of lower credit scores, higher purchase prices, or low down payments.
They may want to confirm that your monthly earnings are sufficient to handle the increase in monthly payments. They may also need assurance that your earnings will continue throughout the length of the contract.
Know what to expect and prepare the appropriate documentation. This increases your chances of buying the car you want, at an affordable interest rate.
Income Verification for Auto Loans
Banks, credit union, car dealers, and finance companies sometimes verify earnings when evaluating an auto loan application. The purpose is to confirm that the amount of your future income is sufficient to cover your projected monthly payments. Most lenders will cap the monthly payment for a car loan at 10 – 15% of monthly salary.
There are many different lenders and each utilizes unique criteria. However, four general guidelines determine whether they will validate the amount of money that you make.
- Credit scores – borrowers with very high credit scores (above 700) can often obtain a car loan without corroborating wages. Those with lower scores will need to offer proof that they can make the monthly payments on time.
- Purchase or repair price – car buyers purchasing lower-priced new or used vehicles or fixing up an old jalopy are more likely to qualify for financing without substantiating wages. Those buying models that are more expensive will have to demonstrate that they can handle the larger monthly payments.
- Down payment – borrowers making very large down payments are also more qualified and do not need to demonstrate proof of earnings. The fact that they can save a large sum of money provides sufficient evidence. Those making smaller or no down payment have lesser qualifications, and therefore need to compensate.
- Debt-to-Income Ratio – car buyers whose projected monthly payments are very high relative to reported monthly income are living check-to-check. Lenders will want assurance that earnings are stable.
If you fall into one or more of these high-risk factors be prepared for income verification. The automotive lender may request recent paystubs, tax returns, and other forms of paperwork. The type of documentation depends on how your household earns its money.
The automobile lender may request recent pay stubs in order to verify income if you work as a W2 employee. A W2 employee works the hours set by the employer under their control and direction. Collect at least the last three months of recent paychecks before applying.
Do not falsify the documentation by using a fake pay stub generator. This is fraud. It could lead to a criminal record. In addition, if you need to manufacture fake pay stubs, you are probably getting in over your head.
The auto finance company may request copies of recent tax returns in order to verify income. Expect this if you work as an independent contractor, 1099 employee, or you own your own business. An independent contractor sets his or her own hours and works outside the direct control of an employer.
In this case, they need to determine your net compensation after business expenses, so a 1099 statement by itself is insufficient. They will need to see 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.
Many applicants have other sources of earnings that can help them qualify for a larger monthly payment. The automotive lender will want to verify these supplemental income streams as well. Be prepared to present appropriate documentation if any of these apply to you.
- Social Security Income (SSI)
- Disability insurance
- Child support
- Public assistance
Employment Verification for Auto Loans
Banks, credit union, car dealers, and finance companies sometimes verify employment when evaluating an auto loan application. The purpose is to confirm that your earnings are likely to continue throughout the term of the contract. Some terms extend up to seven years. Therefore, they need to know that you have a stable work environment.
Expect that many lenders will confirm employment through electronic verifications, or by direct calls to employers. Of course, this guideline applies based on how you fare on the three main underwriting criteria.
- Credit score
- Purchase price
- Down payment
Vehicle lenders frequently utilize electronic verifications to confirm employment. This method relies on a database of pre-published employment information. The process is very fast, reliable, and unobtrusive.
Equifax provides an electronic employment authentication process. The information comes directly from 5,500 employers nationwide and contains basic information about the stability of your work environment.
- Employer name and address
- Headquarters location
- Job title
- Employment status
- Hire date
- Length of time with employer
Personal loans based on income only follow a similar process.
Calls to Employers
The auto finance company will sometimes make calls to your employer to verify employment. They do this because the electronic method is not comprehensive. The database covers only 75% of the largest employers. Many small businesses do not contribute to the file.
Employer calls are less frequent than in the past. Many employers do not want to divulge private information. Nor do they want to waste valuable resources answering calls from multiple lenders.
If you are a marginal applicant, contact your employer in advance and ask for their assistance. A successful employment verification can make the difference between an approval and a rejection of your auto loan request.