Pay stubs are among the go-to documents lenders use to approve or reject car loan applications, and if you’re wondering, ‘How many pay stubs do I need for a car?' you’ve come to the right place for answers.
This article will discuss how your pay stubs play a crucial role in proving your capacity to repay your desired car loan, the exact number of pay stubs you need for your application, the different ways you can acquire them, and alternative documents you can use if you are self-employed or a new hire.
Without further ado, let’s get started with finding out how many pay stubs are needed for a car loan.
Key Takeaways
- At least two to three months’ worth of pay stubs, or around three to six pay stubs, is the minimum number of pay stubs needed for a car loan.
- Auto loan financers require pay stubs to assess whether the borrower’s income is enough to make consistent and timely loan repayments.
- Aside from pay stubs, W-2 forms, Form 1040, Schedule C, Profit or Loss from Business, annual tax returns, and bank statements are also commonly accepted.
The Importance of Pay Stubs in Car Financing
The importance of pay stubs in car financing primarily lies in the fact that they provide confirmation that you regularly earn money from a legitimate employer, company, or income source. But even more importantly, pay stubs contain all the important information about your income and taxes.
Verify Income
One of the first things that auto loan financers check on your pay stub is your gross income, which they multiply by 12. They compare the resulting amount with the annual income you declared in your loan application to see whether they match.
Identify Potential Scammers
Another key detail that car loan lenders keep a close eye on is your taxes. If they see that a specific percentage is consistently withheld from your income to pay taxes, it indicates that you responsibly pay your taxes.
Scammers naturally evade their tax obligations to avoid getting caught by the authorities. On the other hand, gaps in paying your taxes suggest gaps in your employment.
Authenticate Pay stub Information
Aside from confirming your income and tax information, loan financers will also double-check your employer’s information. Fake pay stubs contain false employer information and fabricated income, tax, and year-to-date values.
Car loan financers will attempt to contact the employer declared in your pay stub to verify their authenticity and check that you are currently employed by the said company.
Determine W-2 Employees from 1099 Employees
Loan financers want to assess whether your pay stubs are from the same employer. They are also keen on determining whether you consistently receive income in the same currency and if the pay stubs you presented follow the same formatting.
Pay stubs and income in different formats and currencies mean that you generate income from multiple sources, thereby implying that you may be an independent contractor or a 1099 employee.
That said, you must present documentation of all your income sources.
How Many Pay Stubs Do You Need For a Car Loan?
You need at least two to three month’s worth of your most recent pay stubs for a car loan. It is the standard number of pay stubs that lenders and banks typically require.
If you are currently employed, it should be a lot easier to get or request copies of your most recent pay stubs.
On the other hand, the exact number of pay stubs you need to prepare will also depend on your company’s pay period or the frequency at which you receive your wage or salary.
For example, if you are paid biweekly or semimonthly, then you must present four to six pay stubs. If you are paid monthly, then you must show two to three pay stubs.
How to Get Pay Stubs For a Car Loan
There are many different ways to get a pay stub for a car loan, as not all individuals applying for auto loans are W-2 employees or receive their pay stubs using the same method. Some applicants work independently with clients and do not receive pay stubs from an employer.
That said, let’s discuss the different methods one by one:
- Getting pay stubs from your employer. Contact your HR or payroll personnel at your current company and request copies of your latest pay stubs. You can also check your email or employee portal and try to find digital copies of your pay stubs.
- Getting pay stubs from the bank. To get pay stubs from the bank, first, inquire at your nearest bank if they offer assistance in helping you acquire copies of your pay slips or paychecks. If they do, the bank will send you a list of requirements that you must fulfill. The bank will also check your account status and review your submitted requirements.
- Generate your own pay stubs. If you are an independent contractor, generating your own pay stubs using an online pay stub generator is the easiest way to prepare your proof of income. Online generators provide ready-made templates, and even a built-in calculator to help you quickly create pay stubs with accurate information.
Other Documents You Need to Finance a Car
Now that you know how many pay stubs are needed for a car loan, you must also be knowledgeable about the alternative documents you can use to finance your dream car.
Car loan financers also accept the following documents:
- Bank statements. It is crucial to note that submitting bank statements in place of your pay stubs also increases the likelihood that loan financers will review your current credit score.
- Form W-2. The IRS Form W-2 Wage and Tax Statement reports all wages paid to an employee and the total amount of taxes withheld from their income to fulfill their tax obligations. You can get your W-2 form from your employer.
- Form 1040. Form 1040, U.S. Individual Income Tax Return is an IRS form used to file your annual income tax return. The said form provides information on your total earnings in a tax year and is best used by freelancers and independent contractors.
- Severance package. The severance package is a type of compensation or financial support given to employees who have lost their jobs. You can use your severance package if you want to apply for an auto loan while seeking new employment.
- Tax records. Compiling at least two to three years’ worth of tax return records is another viable alternative if you are a 1099 employee.
The Purpose of Proving Income For a Car Loan
The purpose of proving income for a car loan is to avoid instances wherein the debtor is unable to repay the loan amount and interest in full come collection time.
By providing valid proof of income, such as the correct number of pay stubs needed for a car loan, lenders also consider other key financial details when deciding whether to accept or reject your application.
Credit History
Your credit history is a good indicator of how responsible you are in managing your expenses and fulfilling your financial obligations. A good credit score shows you pay your credit or loans on time and that you have a clean record with banks and other financial institutions.
Meanwhile, a low credit score may mean you tend to repay your dues past the deadline. It may also mean that your current income is insufficient to match the amount you wish to borrow.
Debt-to-Income Ratio (DTI)
A debt-to-income ratio gives loan financiers a better reference for evaluating whether your payment responsibilities, such as bills and daily expenses, are manageable long-term based on your regular income.
They want to know whether you have enough income left after fulfilling your essential expenses or not. Ideally, you must have a DTI ratio that’s less than 50% or 45% to qualify for a car loan. Loan applicants with debt-to-income ratios that exceed 50% often get rejected.
Payment to Income Ratio
Your payment-to-income ratio shows the percentage of your regular pay that goes into paying part of your desired loan amount. Knowing your payment-to-income ratio also lets lenders determine the correct estimated payment cap.
Your estimated payment cap is the interest rate limit or the highest potential rate you may be obliged by the lender to pay. From the lender’s perspective, the payment cap reflects the highest possible amount they can earn as a creditor.
How to Prove Income For a Car Loan If You’re a New Employee
To prove your income for a car loan as a new employee, you’ll probably need to have a cosigner and a high credit score, as relying on your pay stubs (if you’ve already received some from your current employer) is not a feasible option.
Indeed, the challenge in securing a car loan as a newly hired employee lies in showing solid proof that your income meets the minimum requirements set by the bank or lender.
So, if you have a good credit history and score, that will increase your chances of getting a loan approval, and what you can do is provide character references for lenders to review your employment history.
Additionally, lenders will evaluate the nature of your work and the industry to which it belongs. They do this to check whether income is continuous and stable in your line of work.
And lastly, if possible, try to find a cosigner with a good credit record and a high credit score to help certify your loan qualifications.
How to Prove Income For a Car Loan if You’re Self-Employed
Aside from preparing your own pay stubs, there are other documents you can use to prove your income for a car loan as a self-employed individual:
- IRS Schedule C, Profit or Loss from Business. Declaring your profits and losses lets lenders review your potential to sustain and expand your income and repay the loan continually.
- Proof of residence. Your proof of residence indicates that you reside at a permanent address and that you also have the financial backing to afford your mortgage or rent. If possible, attach copies of your latest utility bills to your proof of residence to provide stronger evidence of your financial stability.
- Tax returns. Providing your annual tax returns signifies that you are a responsible taxpayer and a trustworthy debtor at that.
4 Best Practices to Consider When Getting a Car Loan
Knowing exactly how many pay stubs are needed for a car loan is just the tip of the iceberg when getting a car loan.
Include the following steps to ensure you stay prepared and possibly figure out other ways to improve your chances of getting approved for a loan:
- Compile all necessary documents in advance. Once you have noted all the required documents for your auto loan, gather all the requirements and secure them all together in a folder or an envelope.
- Maintain records or copies of your pay stubs and tax forms. Whether you receive a physical or electronic copy of your pay stubs or generate your own pay stubs, it is best to compile them in one folder for future use. The same practice applies to all the tax forms you receive from your employer or use in filing your taxes.
- Secure financing quotes in advance. Don’t settle for the first auto loan financier you encounter. Take your time exploring other offers and weighing your options. Find a financier whose proposition highlights value for your money and understands your financial situation.
- Choose short-term payments. While short-term payments tend to leave a larger dent in your pockets, they are more manageable and less prone to late payments. Long-term payments tend to drag on your cash flow because they require several months of commitment. At the same time, long-term loans can possibly affect your credit score if you are unable to repay your debt in full within the given time frame.
Final Thoughts
When it comes to determining how many pay stubs are needed for a car loan, always prepare at least two to three months’ worth of your latest ones.
But other than focusing on the number of pay stubs to submit, you must also ensure that you have secured all the needed documents and carefully assessed all your options in choosing the most suitable lender.
How Many Pay Stubs Do I Need For a Car FAQ
#1. What documents do you need to provide to get a car loan?
You need to provide the following documents to get a car loan: proof of income, proof of identity, proof of residence, credit history, banking history, vehicle information, and proof of insurance.
#2. How long does a car loan approval take?
A car loan approval can take anywhere from one business day to a few weeks. It all depends on the documents you have presented and your qualifications. The duration of your auto loan approval will also differ depending on whether you applied for a loan from an online lender, a bank, a credit union, or a dealership.
#3. Do car dealerships require pay stubs?
Yes, car dealerships require pay stubs. Ideally, dealerships are responsible for verifying whether a loan applicant’s pay stub is real or not. Otherwise, banks could sue the dealership if it ends up forwarding falsified pay stubs and other financial documents.
#4. Can I finance a car without pay stubs?
Yes, you can finance a car or a car loan without pay stubs. However, expect a more tedious and challenging process in return. Providing valid proof of income is crucial to financing basically any type of loan. But if that is not a viable option for you, try to get a cosigner or ensure that you have a clean and excellent credit record to boost your chances of getting approved faster.
#5. How many bank statements do you need for a car loan?
You’ll need as many as three to six months’ worth of bank statements. That’s more documents to prepare compared to how many pay stubs you would need to submit for a car loan.
#6. Can your car loan get denied?
Yes, your car loan can get denied. Some of the possible reasons include inconsistent payment patterns for utility bills and rent, low credit scores, and existing financial disputes that may involve unpaid loans or fraudulent loan application documents.
#7. Can I use my W2 form to get a car loan?
Yes, you can use your W2 form to get a car loan, especially if you are unable to secure the required number of pay stubs for a car loan.
