One of the most difficult types of bad credit car loans to get approved is for customers that are waiters or waitresses.
Tip income
At AutoNet Financial, we want those potential bad credit car loan customers who are either waiters or waitresses to know that it can be very difficult to get a loan approved. So before you fill out the application, you need to know that both the dealer and the lender will be looking for absolute verification of the dollar amount that you enter on the “income” line. Here is why:
Many wait staff employees report only a portion of their tip income on their tax returns. This practice has been going on for years and for many waiters and waitresses, it is a way to avoid paying income tax on a portion of their income. The Internal Revenue Service is very clear on the issue when it comes to the reporting of tip income. If you receive tips, here is what the IRS requires you to do:
1. Keep a daily tip record.
2. Report tips to your employer.
3. Report all your tips on your income tax return.
The rules, as you can see, are simple. If you receive a tip, it needs to be reported as income. Tips made via credit card are usually added to your yearly W-2 (wage and tax statement) by your employer. Tips that you receive in cash are harder to track (or are ignored) and it is your responsibility to report them to your employer. In fact, the IRS has a form that you can fill out on a daily basis to keep track of your tips.
It is also the responsibility of the employee to not only report this amount, but to pay taxes out of this amount to the employer. Many waiters and waitresses ignore this and think that they are saving money by ignoring this income. While this may decrease the amount of income tax that is paid, it can make it very difficult to buy a car – especially with a bad credit car loan.
Proving your income
While traditional banks usually don’t require proof of income, this isn’t the case with bad credit lenders. If the total income is not listed on a W-2 or on your tax return, as far as the subprime lender is concerned, it just isn’t there. Even if you have bank records that support this additional income with daily or weekly deposits, if it isn’t reported to the IRS you don’t have “proof” of your income.
Income and bad credit loans
Most subprime lenders have a minimum monthly income requirement. They will also use your stated income to compute your monthly debts in order to come up with a budget for your car payment. This could affect you in two ways:
1. Most subprime lenders have minimum monthly income requirements that range from $1,500 to $1,800. If you are a wait person and your base wage is $3.00 per hour, this computes out to $516 on a monthly basis (based on a 40 hour work week). Even if the employer reports tips of $175 per week (based on your credit card sales), this still only adds an additional $753 per month to your bottom line. This means that the total reported income for the month is $1269. In this case, the minimum income requirements for the lender have not been met and you would not qualify for a loan.
2. Even if your reported income meets the lender’s requirements, you may have monthly expenses that are out of proportion to your income. As an example, you report income of $2,000 per month including your base hourly wage and your reported tips. Your actual monthly income is $4,000 and you have monthly expenses of $1800. Even though your debt to income (actual) is fine, the difference between your reported income and actual expenses would not qualify you for a loan because this would show that you only have $200 left after all your expenses.
In conclusion
If you receive a significant amount of your income from tips, you need to report this income to your employer. This situation is even more critical if you need to purchase a car with a bad credit car loan. If your income is not reported on a W-2, or if you don’t include it on your income tax form, the banks that do special finance loans will not allow you to count it as income for lending purposes.
For more information on tip income, visit the IRS website at: http://www.irs.gov/pub/irs-pdf/p531.pdf. For more information on bad credit car loans, visit our web site at www.AutoNetFinancial.com.
