Financing a Car Loan When Self Employed
Financing a Car Loan When Self Employed
Posted on January 31, 2023
Self-employment, gig working, freelancing, contracting and other alternatives to being an employee are still on the rise. This sector was expanding before COVID but has been accelerated exponentially by the pandemic. So how can you qualify for a car loan as someone who is self-employed? What’s the process? Our auto loans team explains.
Getting a Self Employed Car Loan
Lenders don’t actually care where your income comes from. All they care about is that’s it’s regular, predictable and sufficient to make the repayments (and legal of course!).
As long as you can demonstrate your income does that and you have a good credit score, you’ll get a loan.
That means two challenges. Proving your income and balancing tax deductions so that income is sufficient to qualify for a car loan.
Having Good Credit is Key
If you have good credit, it makes the process of getting a self-employed car loan much easier. Lenders are flush with cash that needs to be allocated.
Since these lenders are motivated to issue loans, you just need to conform to their underwriting requirements.
To access prime interest rate car loans, your credit score must be over 680. You can check your credit score for free with both TransUnion and Equifax, since most lenders use both credit reporting agencies be sure to review both.
Credit score under 680? You can still get a self-employed car loan in Halton but the financing costs are going to be higher.
Proving Income When Self Employed
This is your #1 challenge as a self-employed person. Proving your income. Unless you’re exceptionally fortunate, your income is going to fluctuate and be unsteady, at least at first.
You’re going to have to be organized. Record every payment, create an income spreadsheet or have your accountant do it for you.
We recommend the latter, at least at first, as having an accountant leaves you free to do what you do best, build your business.
Set up a business bank account and have all your income paid into it. Have all your business expenses taken out of it too, so it provides a clear picture.
When it comes time to apply for an auto loan, having several months or more of business bank accounts showing your income will significantly help your application.
Be expected to provide a couple of tax returns too if you have them.
Managing Tax Deductions
A key benefit of being self-employed is being able to write off a lot of your expenses to tax. At the beginning, this is incredibly valuable as you’re growing and getting settled in your new career.
However, you need to balance deducting everything possible with showing income on your tax return.
Some lenders won’t look past the numbers on the tax return when assessing your loan application, which can be problematic.
You either have to deduct less to show a higher income and pay more tax or pay less tax and risk showing a lower income.
Get Pre-Approved
Auto loan preapproval can be a useful tool to tell you in advance how much you can borrow. Most online preapproval calculators don’t worry about the type of work so don’t worry about that. Just use your average income and complete everything else as normal.
Car loans for the Self Employed
You can offset much of this if you can save for a decent down payment and prove your income. If you use an accountant, proving income should be straightforward.
Saving for a down payment may take a while depending on how successful you are but the more you can put down, the more likely a lender is to offer a loan.
In the meantime, keep increasing your credit score as much as possible, pay down as much debt as you can if you have it and make sure as many of your payments as possible are reported to the credit bureaus.
If you're ready for a car loan in Southern Ontario, we'd love to help with that! simply fill in the form below to get started.