When you apply for a loan, whether it’s a car loan, a mortgage or a personal loan, the lender generally will require you to show proof of income. The lender does this because it wants to be sure you can afford the monthly payments and be able to pay the loan back in full. There are a few different ways you can prove your income, and a lender may require you to provide more than one document.
One of the easiest and most common ways to prove your income is to provide income on your pay. If you work at a regular job, one or two of your most recent pay stubs may be enough to prove your income to your lender. If you work as a contractor or freelance worker, you may be able to offer a payroll schedule or a letter from the person or company who employs you.
Lenders often ask for income tax returns as proof of income. Unlike pay stubs, which show the income you are making over a couple of weeks or a month, tax returns show your income over a longer period of time, which shows whether your income is stable or not. Many lenders ask for both recent pay stubs and a year or two of tax returns.
Another document that a lender might ask for to prove income is a bank statement. If you are receiving your income from an annuity or some other investment vehicle, a bank statement can show that there are regular deposits that have continued over a long period of time. If you have earnings directly deposited into your bank account, this will also show up on your bank statement.
Proof of income is just one level of due diligence a lender will do before approving you for a loan. You should be prepared to undergo a thorough vetting that may take a few days.