Why Do Banks Ask For Pay Stubs

Going to the bank to open a new account, get an auto loan, apply for a mortgage, or even just to check on your credit score can be stressful, especially if you don't know what kind of documents you might be asked to provide.

It's important to know that banks verify income for a wide variety of reasons, but mostly to protect consumers while also giving them as many financial options as possible.

Some banks can provide no-verification loans, but those loans are usually more expensive and can make it harder to manage any existing debt because your new payments will probably be higher.

Instead, lenders prefer to get proof of income or some other guarantee that the people they lend to will be able to pay back their loans.

There are a lot of financial documents you might need to verify income, but let's start with pay stubs and why your bank might need you to provide pay stubs as proof of monthly income before approving you for a new account or loan.

Why Do You Need Proof Of Income?

Income verification is one of those things that pretty much everyone has to do at some point, but it can be frustrating in the moment. Whether you're hoping to get a new auto loan or need to provide proof of income to finalize a new lease, it can be hard to understand why you need to provide a pay stub or other proof of income.

There are a few key reasons:

  • Proof of income can help make up for a low credit score

  • Your income is important for calculating your debt-to-income ratio

  • Income proves you can afford monthly payments, and how much

  • Your pay stubs give a better picture of your financial health

  • Income verification can lower your interest rates

  • Income verification with pay stubs can prove you have a new job or recently improved your income more than your tax return or other financial documents demonstrate

  • Proof of income might make your bank statements less important, or change your previously calculated debt-to-income ratio.

Pay stubs aren't usually used to verify business income if you're an entrepreneur or self-employed, but they can be a good option for getting approval for car loans, mortgages, and other kinds of personal finance loans.

While it can be frustrating to provide a pay stub, it can actually be in your best interest to provide a recent pay stub if your financial situation has changed, or if you otherwise might not be able to qualify for the loan you want.

Most often this shows up when you want a car loan, but there can be other kinds of loans that require a pay stub, or a few months of income verification, and it's easier to have your income verification documents ready in advance if you need them.

Why Do Banks Verify Income For An Auto Loan?

Car payments can be a big expense and take up a significant amount of your income for a lot of homes. Making sure you can pay back an auto loan is one of the primary responsibilities your bank has before they offer one.

Being able to verify income and do other checks before issuing an auto loan is one of the reasons that a bank auto loan is usually cheaper than an auto loan directly from a dealership.

Not every auto loan will make banks verify income, but it's better to be prepared with pay stubs or other income verification documents just in case.

Do Banks Verify Income For Other Kinds Of Loans?

Yes! Banks verify income all the time, it's almost routine to verify income for auto loans, to check your debt-to-income ratio for your credit score, or when calculating a reasonable interest rate on just about any kind of loan or loan pre-approval.

The bigger the loan or the riskier your finances seem on paper, the more likely your bank is to ask for income verification like your most recent tax return, most recent pay stub, or other proof of income.

How Pay Stubs Can Help If You Have A Low Credit Score

Sometimes providing a pay stub can actually help make up for other problems with your loan applications and make it easier to get a car loan or mortgage or rental lease when you need one. Here are some of the ways that providing a pay stub can help even if you have a low credit score.

Prove You Have The Income Needed To Pay Your Bills

Pay stubs make it easier to show that you can afford to compensate lenders, even if you have existing debt or other factors that make you an increased-risk borrower.

Most lenders aren't looking for perfect borrowers, but they want some assurance that you can manage your total debt. If you let them verify your income it's more likely that you're going to be a good prospect, especially if your pay stubs do show that you have the income to handle how much total debt you've accumulated so far.

Pay Stubs Can Show You're Working To Improve Your Credit Score

A recent pay stub may also be proof of a promotion, a job change that comes with higher wages, or that you've developed additional income streams that will help you improve your credit score in the near future.

For lenders like a large financial institution, someone on the verge of improving their income ratio and going from bad credit to good credit can be a great investment.

If your net pay is better than it used to be, pay stubs may even lower your overall risk rating.

Having Proof Of Income Can Help Avoid Needing A Cosigner

Lenders typically want some assurance that they're going to get their money back, and don't really care who they get payment from as long as it's on time and the amount they expect.

If the income listed on your tax returns is lower than your current income, providing a pay stub may make it easier to complete the application process and may mean that you don't need a cosigner or guarantor, even if your credit score or other risk factors say otherwise.

Avoiding Fake Pay Stubs

Some people have created fake pay stubs or didn't realize that they'd been given a fake pay stub, and tried to use them to verify income.

Unfortunately, providing a fake pay stub probably won't work, and a fake pay stub may even be proof of fraud or other more serious problems.

To avoid fake pay stubs, especially if you're trying to create a valid pay stub for yourself, it's important to understand state requirements for pay stubs and all the information a pay stub needs to include each pay period.

One of the easiest ways to make sure you're meeting requirements is to use a pay stub generator.

If you have a pay stub and aren't sure if it's valid, you can also get your pay stub validated.

Other Ways Banks Verify Income

Of course, paycheck stubs aren't the only way you can verify income for auto loans and other loans. If you're self-employed, retired, or receive income from investments, royalties, or other non-traditional sources, you won't necessarily receive pay stubs. Here are some alternative forms of income verification:

Other Income Verification Documents

You may need to provide multiple forms of income verification depending on what you're applying for, or even just which documents you're able to provide. If you aren't sure what kind of income verification documents to bring, you can always call your bank or another lender to find out what they'd like to see.

W2

Your W2 is a document your employer provides that breaks down your income, what was already paid in taxes, and other information about your income. It can be a useful document to verify your income and speak to your long-term financial health, especially if it shows things like retirement account contributions or other responsible financial moves.

Retirement Benefits

Your retirement benefits from social security, pension payments, a 401k, IRA, or investment accounts can all be used as proof of income if you don't have a pay stub.

Just make sure you bring proof of all your income streams because that can lower your interest rates and show your lender that you're a responsible borrower with the money to make loan payments on time.

Welfare And Social Security Statements/Checks

If you're receiving disability benefits or any other kind of social safety net payments, those do count toward your income. These can also include benefits from military service and basically anything that adds to your overall income.

Providing documents showing that you've been approved for benefits, and the monthly or annual totals, can also be used to verify your income.

Recent tax return

If nothing about your income has changed significantly since your last tax return, your tax return may be one of the easiest ways to prove your income to get approved for a lease or loan.

Proof Of Employment

In some cases when pay stubs aren't available yet and or you don't have a long enough income history, you can use proof of employment as a way to qualify for auto loans, new leases, and other kinds of loans.

Proof of employment is usually most useful when it's a recent change and you don't yet have other documents to show your new income, and can be used in combination with documents verifying your old income.