More and More People Need Self-Employed Car Financing
Intuit Canada estimates that 52 percent of Canadians will be self-employed by 2022.
So, whether you freelance or own your own business, you're in good company. But freedom has its price. Being self-employed presents a set of unique challenges that you won't find in your typical 9 to 5. Chief among these is a difficulty acquiring self-employed car loan financing.
3 Reasons Self-Employed People Have A Hard Time Getting Car Loans
For banks, car loan financing means balancing risk and reward.
So, they tend to favor individuals with stable incomes. Unfortunately, this is something many self-employed workers lack.
But, inconsistent incomes are only part of the problem. There are actually three other reasons getting self-employed car financing is such a chore
- An Inability to Verify Income: Whether it's looking at your taxes or your bank statements, lenders need to verify your income. Since self-employed workers tend to exist in a state of constant flux, this can be difficult. So, you'll need to bring your last couple of years of tax returns and a few bank statements. For the self-employed with poor organizational skills and undeclared incomes, this is hard.
- A High Debt-to-Income Ratio: When it comes to self-employed car financing, dealers and lenders often become hyper-focused on your debt-to-income ratio (DTI). As a lot of self-employed workers, rely on small business loans to make ends meet, their DTI ratio is often skewed. If you end up with a DTI higher than 50-percent, lenders are more likely to reject you. To calculate your DTI ratio, add up your monthly bills and divide it by your average pre-tax income.
- Too Many Deductions: There are plenty of deductions available for self-employed Canadians. While it's great to save a few grand on your taxes, overusing them can make it difficult to secure car financing. This is because lenders only look at your net income after deductions.
Which means, even if you make enough money to get approved, your loan could still end up in the trash heap.
Here Are 5 Factors Key to Self-Employed Car Financing
Banks and other loan providers rely on five key factors to determine your eligibility for a car loan. These remain the same whether you're an independent farmer or a stand-up comedian:
- Your Credit Score: This three-digit number is directly correlated to your ability to take on debt. Based on things like the number of accounts in good standing and number of payments made on time, this score varies slightly between the three major credit bureaus. Having a credit score below 600 makes it more difficult to secure self-employed car financing.
- Your Credit History: Lenders will take a look at how a self-employed applicant has handled debt in the past. In addition to a history of non-payment, they'll keep an eye out for signs that you use credit cards to make ends meet, accounts in collections, loans that you've cosigned on, and whether or not you've short sold a previous home.
- How Stable Your Employment Is: About half of small businesses fail within their first five years. For this reason, a lot of lenders are reluctant to provide car loans for the self-employed. The longer you've been working for yourself, the easier it will be to secure self-employed car financing.
- Your Ability to Verify Your Earnings: To get your self-employed car loan approved, you'll need to demonstrate your ability to make consistent monthly payments. For those looking for self-employed car financing, this means providing a year or two worth of tax returns and your most recent bank statements.
- Your Down Payment Amount: Most people put between 10 and 20-percent down on a car. But this might not be enough for a self-employed Canadian. The higher your down payment, the less risk your lender takes on. If you're having a hard time getting financing, it might be because you're not putting enough money down.
The 4 Things You Need to Do to Get a Self-Employed Car Loan
With a better understanding of how car loans work, you can make better use of these car for the self-employed. While it might seem complicated, car financing usually takes just four steps:
Fix Your Credit:
If your credit score is in the gutter, you should take a few steps to improve it before applying for a self-employed car loan. Start by:
- Paying your bills on time
- Making all your accounts current
- Using Experian Boost to ensure you're getting credit for utility and cell phone payments
- Reporting inaccurate information
Get All Your Ducks in a Row:
Having the right paperwork can make it easier to secure financing. In addition to your last two years of tax returns, you'll need to bring:
- Something that proves your identity
- A couple of bank statements
- Your proof of residence
- Your proof of insurance
Pick Your Dealership:
Whether or not you get approved often depends on the dealer or lender you go with. Before making an appointment, make sure your dealer has:
- Honest sales tactics
- Good reviews
- A customer-first mentality
- An above-average service facility