back to articles | May 23, 2023 | Moses Mwangi

Categories: Useful Automotive Information

How to Get an Auto Loan When You Are Self-Employed

One of the primary conditions that most auto loan lenders require is proof of income to approve car loans. A letter of employment or a pay stub is usually sufficient. But what happens when you are self-employed?


One of the primary conditions that most auto loan lenders require is proof of income to approve car loans. A letter of employment or a pay stub is usually sufficient. But what happens when you are self-employed?

If you are self-employed, getting an auto loan is still possible. However, it can be more challenging to access these loans than if you had regular employment. So, how do you go about getting an auto loan when self-employed? Below are a few recommendations you can use to get an auto loan.

1. Provide proof of income

Most auto loan lenders want to know whether you can effectively make loan payments before issuing an auto loan. The best way to prove that you are qualified for a loan if you are self-employed is by having proof of income.

When applying for an auto loan, provide your lender with bank deposits and slips. These deposits and slips will show the lending institution that you earn a stable income and have the ability to pay off the car loan.

In addition, you can provide the lenders with bank statements showing regular bank deposits. Most auto loan lenders will require at least six months of bank statements. The bank statements will show your lender that you generate enough funds to repay the loan.

2. Provide lenders with your tax forms

Tax forms, like bank statements, are vital in proving your income. These tax forms increase the chances of self-employed individuals getting a loan. Some of the documents that you can have include:

  • 1099
  • Schedule SE
  • Schedule C
  • Form 1040

Another vital thing to note is that most lending institutions will ask you to provide at least two years of tax returns. If you do not have any tax return forms, any other document that proves stable monthly income is sufficient.

3. Have good credit

One of the primary elements lenders will look into when considering auto loan approval is your credit score. It does not matter whether you are self-employed or employed; your credit score will impact your ability to secure an auto loan.

If your credit score is high, auto loan processing can be much easier. However, if you have a low credit score, you must provide lenders with extra paperwork proving your ability to make on-time loan payments. One thing to note is that you will get auto loans at a high-interest rate if you have bad credit.

Therefore, always strive for a good credit score to access cheaper car loans. A good credit score will also show lenders that you are a responsible self-employed borrower who can make regular payments. Generally, lenders look for borrowers in the prime range, so you will need a score of 661 or higher to qualify for most traditional auto loans.

4. Have loan references

Auto loan lenders will want to know that you are a reliable borrower and having a loan reference may help. A loan reference refers to having family members, friends, and clients confirm your reliability. Some auto lenders will sometimes ask for contact information from professional and personal references.

These lenders will contact the references and inquire about your work history. For instance, auto lenders can talk with your landlord to confirm whether you make timely rental payments. Therefore, having reliable loan references can increase your chances of receiving an auto loan.

5. Make a large down payment

A car down payment provides one of the best ways for self-employed individuals to increase their chances of getting a car loan. It involves money paid to car dealerships or private car sellers by buyers. This money is a fraction of the total cost of the vehicle. Most car buyers make a 10-20% down payment.

The down payment will reduce the auto loan amount you need to finance your car purchase. It will also show lenders your ability to make loan payments. The more the down payment you make, the higher your chances of receiving an auto loan.

Down payments have an inverse relationship with car loans. The more the down payment, the less the loan amount you will need to borrow. In turn, the faster the loan repayments.

6. Provide lenders with proof of residence

If you have a stable place of residence, auto loan lenders may have more confidence in you. Therefore, when applying for an auto loan, provide the lenders with proof of constant residence.

You can give them proof of your stable mortgage, rent, cable bills, and utility bills payment. These payments will show lenders that you are financially responsible and can handle making regular car loan payments.

7. Wait until you are self-employed for a longer period

You may have trouble getting an auto loan if you are newly self-employed. It is because most lenders will require more than two years of proof of tax returns. They will also need at least six months of bank statements that demonstrate you have a stable income.

Thus, if you are newly self-employed, take your time to grow your income history and have the necessary tax forms. It may be worthwhile to wait as it will increase your chances of receiving an auto loan.

8. Have an auto loan guarantor

Having an auto loan guarantor can increase your chances of car loan approval. The guarantor can serve as your safety net. If you fail to make loan payments, the guarantor will take responsibility for making those payments.

These auto loan guarantors sweeten the deal for auto lenders. If the lenders know you have someone with a more stable income they can rely on, they will have confidence in giving you the loan. When choosing a guarantor, ensure it is with someone who understands the associated risks and can settle the auto loan if you can’t.

9. Proofread your application documents

Small errors in your auto loan application documents can make a significant difference. For example, if you have to fill in any forms, writing the wrong address may reduce your chances of approval, especially if the lenders cannot find the address.

Thus, it is best to make sure that everything is correct. Proofreading and fixing small errors provides an excellent way to increase your chances of auto loan approval.

10. Make sure you can afford the auto loan

Having proof of income is incredibly beneficial when requesting an auto loan. But can you afford the auto loan you want? Circumstances for a self-employed person often change. Thus, make sure that you will not struggle to make payments if the circumstances surrounding your source of income change.

For instance, if you are expecting a child, you will have more expenses in the future. Also, factor in time off work. When you include these changes in circumstances, will you still be able to afford the loan? Therefore, before committing to an auto loan, consider your future plans.

Final thoughts

Even though getting an auto loan when you are self-employed is challenging, it is not impossible. The auto lenders will require you to provide more proof of your ability to pay the loan than they will to a regularly employed person. Therefore, having solid evidence that you can make auto loan payments will increase your chances of loan approval.