The term earned income is used to describe the amount of money you bring in each month through employment.
Earned Income can be wages, salary, tips, bonuses or commission you received from your job. It can also be money you earn through being self-employed. Basically, it refers to any income from paid work.
Therefore, it does not include any money accrued through share dividends, interest on savings, or any other “passive” income.
For example, if you earn £1,000 per month in wages/salary, but earn £200 in bonuses on top of this, as well as earning interest from a savings account, only the income and bonuses from your job would count as your earned income and any credit from a lender will be based on this.
This example would usually be calculated as £12,000 + £2,400, meaning that your earned income is £14,400.
Most lenders will assess your car finance application based on how much of a risk you are to lend to. A big factor of this is your ability to meet the payments, and so the amount of money you earn each month is looked at closely. Earned income takes a priority as this is likely to be a regular source of income that can be counted on each month.
You will be asked to prove your earned income during the application and vetting process. Car finance providers must conduct affordability checks to ensure that the customers can afford their finance package. You can prove your income primarily through payslips or bank statements. You can also include any supporting documents, such as details of commission payments, tips or bonuses.
If you are self-employed, you may need to provide additional documentation to prove that the income is regular. This is in your favour as the more you can prove that you are not a risk to lenders, the more favourable finance package you will be eligible for.
Earned income is not the same as net income. Net income is the total amount of money you earn after tax has been deducted. Earned income also does not consider other factors such as rent, regular bills or other payments that you regularly make each month. It is important to bear these in mind when you apply for finance, as you will need to be sure of how much you can afford to spend each month on car finance payments. Don’t leave it to the lender.
Lenders will accept other forms of income that are not so regular, but will require documents proving that it should be included in their assessment. Remember, lenders generally want to lend to you. The more proof you have available, the greater chance you have of getting accepted. It’s a good idea to collect as much information as possible in advance for applying, just so that you are prepared for any requests lenders make.