As we all know, auto loans are a form of credit. And, as such, that involves proving that you’re a good credit risk, even if you’ve had difficulty in the past with your credit. And that might take more documentation than you might at first expect, depending on your circumstances.
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Credit, Credit Scores, And Income
The first question people ask when discussing bad credit auto loans is inevitably “Don’t they just look at my credit score?” And, in fact, that’s a major factor in your auto loan. Credit scores are a handy summary of your credit history and incorporate a surprising amount of data, from any late payments you may have made to the total credit available to you. It’s a tool built to be comprehensive and is widely respected.
However, it’s also not the beginning or the end of your credit history. A credit score is intended to be a picture of risk. Lenders want to know that you’ll pay back the money they loan you, and that you’ll pay it back promptly. The credit score will offer an overview of your history at that point, but not your future.
So while the credit score is useful, every lender and credit provider is aware that it’s far from perfect and there are changes that are made every year that aren’t necessarily beloved. It also has a few drawbacks such as not presenting your income and your current financial situation.
As a result, while lenders and dealerships will consult your credit score, depending on your situation, it will also ask for other documentation.
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Why Your Tax Returns Matter
There are a few situations in which a lender or a dealership will ask for additional documentation, including your tax returns. This will especially be true if your credit is due to one specific problem in your credit history, such as medical bills or a layoff that you’re still recovering from, or if you’re generally paid as an independent contractor. One good way of knowing whether you’re paid as an independent contractor is by the tax forms you receive; if you have to sort through 1099 forms at tax time, you’re probably an independent contractor.
Generally the idea behind requesting these forms is to verify your income year to year. Remember, with bad credit auto loans, it’s all about risk, and it’s not unheard of for someone to lie on these forms. Especially with a bad credit score and an independent contractor role, they’ll want to know your income is what you say it.
If you’re asked for your tax returns, make a point of providing what they need. Generally they’ll ask for your most recent return, but they may ask for up to three years. Remember that they’re looking for a consistent income history, so the clearer a picture you can provide, the better.
Proving Your Creditworthiness
Ultimately, it’s always worth demonstrating that you’re worth lending to. If you keep in mind the lender’s perspective, you’ll be able to secure the car that you need.