Auto lenders compete for referrals from car dealers.
The dealer finance department directs shoppers to banks offering low interest rates, high approval odds, and fast service. Speed is crucial for both dealers and lenders.
Dealers prioritize speed to avoid losing sales when customers leave without completing the paperwork. Lenders value speed to outpace competitors without lowering rates or approval standards.
Therefore, finance companies check income and employment only when necessary, using online databases before manually reviewing pay stubs and tax returns or calling employers.
When Lenders Verify Income & Employment
Auto lenders usually verify income and employment for applicants with low credit scores, small down payments, or high debt-to-income ratios.
However, finance companies want to decide quickly to get more referrals from dealers. They skip extra steps when customers have excellent credentials.
Credit Score
Auto lenders often skip employment and income checks for buyers with good or excellent credit scores.
For example, with my credit score above 800, the lender approved my vehicle loan based only on my credit score, allowing me to drive off the lot without extra steps.
The quick and easy transaction benefited the dealer. However, finance companies can’t automatically approve people with fair or poor credit. They must check that they have a job and earn enough for the monthly payments.
Down Payment
Auto lenders are less likely to verify employment and income when the car buyer makes a down payment of 20% or more.
A significant deposit offers three benefits that appeal to finance companies.
- A sizable down payment shows steady employment and the ability to save money.
- A large deposit lowers default risk because borrowers owe less than the vehicle’s value.
- A hefty down payment reduces the monthly payment, making it easier to afford and stay current.
Quick, easy approvals for buyers with large deposits benefit the dealer, encouraging them to refer more customers to the finance company.
Lenders may need to check earnings and sources when buyers can’t make a down payment.
Debt-to-Income
Auto lenders are less likely to verify employment and income when the potential car buyer has a low debt-to-income (DTI) ratio. A low DTI indicates the ability to afford additional monthly payments.
Banks calculate DTI by dividing monthly debt payments by monthly income. However, it is a less reliable underwriting tool because it combines facts with potential fiction.
- Facts include projected monthly debt payments. Your credit report shows other obligations, the dealer provides the vehicle price, your credit score determines the interest rate and terms, and the down payment reduces the financed amount.
- Potential fiction includes self-reported monthly income. Lenders can quickly approve borrowers with high credit scores, large down payments, and low DTIs to gain future referrals from car dealers.
However, prospective customers with a high DTI (33% to 55%) may need to provide evidence of income and employment, making verification necessary.
How Lenders Verify Income & Employment
Auto lenders prefer using online databases to verify the employment and income of marginal applicants, speeding up the evaluation process.
Car dealers are more likely to refer future buyers to lenders who make quick decisions.
Online Databases
Auto lenders prefer using online databases to verify income and employment because they allow quick decision-making and help dealers close the sale while the customer is in the finance office.
Every second counts, and online databases can quickly provide reliable information for about two-thirds of applicants employed by large and mid-sized companies that report data directly or through payroll services.
Validate your database information before applying for a loan to avoid discrepancies that could flag your file for manual review. Managing your data beforehand can help you avoid phone calls to your employer.”
Common databases to check:
Manual Methods
Auto lenders often resort to manual employment and income verification for marginal applicants when online databases lack information or data doesn’t match the loan application.
Manual reviews, though slow, are necessary for about one-third of potential car buyers, including the self-employed, those working for smaller businesses, and customers who have recently changed jobs.
New Jobs
People with a new job might secure a car loan using an offer letter as proof of income and employment, which the lender would review manually.”
Offer letters are not legally binding and often include contingencies like background checks, drug screenings, reference checks, and an I-9 form for citizenship or legal immigration status.
In other words, an offer letter has limited value to lenders but is better than nothing. If you change jobs, choosing a more affordable vehicle to lower the monthly payment and DTI might be necessary.
Self-Employed
Self-employed individuals, including small business owners, contract and 1099 employees, and gig workers, might get car loans through other manual income and employment verification methods.
Lenders often request several documents from the self-employed.
- Tax Returns: Your tax returns, including Schedule C, show your net compensation after business expenses. You may need to complete IRS Form 4506-T (Request for Transcript of the Tax Return), which the IRS sends directly to the lender for evaluation.
- Bank Statements: These show regular deposits from your business or contract work, providing a more up-to-date look at income. Unlike tax returns, which can become outdated, recent bank statements can demonstrate that your enterprise remains viable throughout the year.
Small Businesses
Auto lenders might call the employer of marginal applicants who work for small businesses that do not report employment and income information to online databases.
Employer calls are time-consuming and can delay the closing of a sale, especially if you are at the dealer after business hours or on the weekend, as the lender would have to wait until the next business day.
Delays give shoppers time to change their minds and buy a car elsewhere, so dealers dislike calls to employers. On the other hand, lenders want to avoid preventable loan defaults from unemployed borrowers.
This tension between opposing motivations exemplifies how auto loan employment and income verification work.
