Are you one of the 16 million Americans who are self-employed? There are a number of wonderful things about the self-employed life.
You’re your own boss, and you get to set up your work life as it suits you, not arranging your life around an employer.
There are a lot of financial stresses and questions that come with self-employment, too. can you finance a used car if you’re self-employed?
It is possible to finance a used car if you’re self-employed. It’s not as easy as those who are employees, but it is possible.
Read on to learn how you can finance a car even though you’re self-employed.
Why Is Financing Tough for Self-Employed People?
You may think that it’s unfair that it’s harder to get financing as a self-employed person. Banks tend to look at it a little differently, though.
Here’s why you face an uphill climb in getting approved for financing.
It has to do with the lender’s level of risk and your income. Lenders want to see two things before they loan anyone money, whether it’s for a car, home, or personal loan.
The first thing is that you’re responsible with credit. If you have a good credit history with a track record of on-time payments, that’s a big plus for you.
The second thing that lenders look for is your ability to pay the loan back. This is where it gets tricky for self-employed folks. The income for self-employed people tends to fluctuate. One month could be your biggest month in years followed by months of little income.
That type of unpredictability makes lenders very nervous. Lenders want to make sure that they get their money back (with interest), so they require more documents and proof of your income.
Not only that, but you don’t have a way to prove your income unless you have all of your invoices and 1099-MISC forms. Even if you have those forms, lenders still want to see the last two years of tax returns.
By giving them a tax return, you just made it harder on yourself. You usually lower your income by taking as many deductions as possible. That can make it seem like you’re insolvent financially.
Lenders look at people with steady jobs and predictable income much more favorably. All they have to do is show a couple of pay stubs and they’re pretty much set.
How to Finance a Used Car
As you can tell, you don’t have it easy to get approved for financing. There are ways you can finance your used car purchase. Like a good business owner, you just need to think outside of the box.
Pay a Large Downpayment
One way to make lenders comfortable with your income is to put more money on the table. You’re taking on more risk in the purchase because if you can’t pay the loan, you lose all of that money you put down.
That makes the bank more comfortable to lend you money, and that will improve your chances of getting a loan.
Have a Co-Signer
You could have a great credit score but have a hard time proving your income. If that is in your category, then you can find someone who has a steady income and great credit to co-sign the loan with you.
You’re responsible for making all of the payments on the used car. If you don’t do your part, the co-signer has to pick up the slack and make your payments.
You need to make sure that you have a great co-signer to work with because you don’t want to ruin an important relationship.
Find a Good Lender
No matter what, you want to find the best car financing deals. That starts with finding a reputable lender. You may be able to work directly with the dealership.
There are some dealers that offer different types of financing, from bad credit financing to financing with great rates.
When lenders evaluate your application, it helps to show growth in income or a steady amount of money coming in the door each month. You may be asked to show a certain level of consistency over the years instead of a couple of pay periods.
If you’re in a situation where you just started your self-employment work, you may need to hold off until you can show that you have a couple of good years of work under your belt.
Raise Your Adjusted Gross Income
Lenders will look at your net income on your tax returns to decide how much you make. Even though you are entitled to take those deductions legally, it may hurt you if you need to buy a car.
You may need to reconsider claiming all of those deductions. It will raise your tax bill, but it will also raise your income. That could be enough to get you approved for a loan.
Gather Your Documentation
You have to be able to prove your income, and if you’re unorganized in your paperwork, that will be hard to do. You want to have as much documentation as possible.
You should have your last two tax returns, contracts, bank statements, and 1099 forms.
Can You Finance a Used Car If You’re Self-Employed?
For more and more people, self-employment is becoming a reality. While there are many advantages of self-employment, it can bring several challenges.
One of those challenges is to get approved for a loan. Can you finance a used car if you’re self-employed? Yes, you can. You just have to be organized and ready to prove that you’re creditworthy.
You should begin by finding a great lender to work with and consider a large down payment or getting a co-signer. You want to show that you have enough income to pay the loan back.
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