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Getting a Car Loan When Self-Employed

Getting a Car Loan When Self-Employed

Securing a car loan when you’re self-employed in Canada can be more challenging than for those with a traditional, salaried job. Lenders view self-employment as riskier due to the potential for inconsistent or unpredictable income. However, with the right preparation and approach, getting approved for an auto loan while self-employed is absolutely possible.


The primary hurdles self-employed Canadians face when applying for a car loan revolve around proving their income and creditworthiness. Lenders want to see a stable, reliable cash flow to ensure you can comfortably manage the loan payments. They’ll also heavily scrutinize your credit history and score as an indicator of financial responsibility.


This comprehensive guide covers all the key steps and strategies for improving your chances of car loan approval when self-employed. From documenting your income to finding the right lender, building credit, leveraging larger down payments, and more, you’ll learn exactly what it takes to get behind the wheel of your next vehicle with a self-employed car loan.

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Proving Your Income

As a self-employed individual in Canada, proving your income is one of the biggest hurdles to getting approved for a car loan. Lenders need to see documented evidence that your income is reliable and sufficient to make the loan payments. Without a regular paycheck stub from an employer, you’ll need to supply alternative documentation verifying your earnings.

Typically, lenders will ask for the following proof of income when you’re self-employed:

 

  • Personal tax returns for the past 2-3 years, along with your Notice of Assessment from the CRA. These show your total income declared.
  • Business financial statements like profit/loss reports that detail your income and expenses from self-employment.
  • Bank statements showing a steady flow of income deposits from your business activities.
  • Client invoices or accounts receivable records that demonstrate your revenue stream.

 

The more documentation you can provide, the easier it will be for the lender to calculate your reliable net income available for car payments. If you’ve been self-employed for less than two years, you may need to also show projected earnings along with existing contracts or work orders.

 

How to Calculate Net Self-Employment Income

As a self-employed individual, proving your net income is crucial when applying for a car loan in Canada. Lenders want to ensure you have sufficient and stable earnings to make the loan payments. To calculate your net self-employment income, you’ll need to subtract allowable business expenses from your gross revenue.

Start by gathering all records of your business income, including invoices, receipts, bank statements, and any other documentation showing money earned through your self-employment activities. Add up all these sources of revenue to determine your gross self-employment income.

Next, make a list of all eligible business expenses you incurred while earning that income. Allowable expenses can include office supplies, advertising costs, vehicle expenses (fuel, maintenance, insurance), home office expenses, professional fees, and more. Certain larger expenses may need to be depreciated over several years.

Subtract your total business expenses from your gross self-employment income. The remaining amount is your net self-employment income, which represents your actual profit from the business. This is the income figure lenders will assess when evaluating your car loan application.

Be prepared to provide documentation supporting both your revenues and expenses, such as invoices, receipts, bank statements, accounting records, and prior tax returns. Having an accountant or bookkeeper assist with calculating your net self-employment income can also lend credibility to the figures you report.

 

Building a Strong Credit History

Having a solid credit history is crucial for getting approved for any loan, including an auto loan when you’re self-employed. Lenders want to see that you have a track record of responsible borrowing and repayment. For the self-employed, maintaining good credit can be even more important since your income may fluctuate or be less predictable than a salaried employee.

Here are some key strategies to build and keep a strong credit profile as a self-employed individual:

 

  • Pay all bills on time – both personal and business. Payment history is the biggest factor impacting your credit score, so avoiding late payments should be a top priority. Set up automatic payments or payment reminders if needed.
  • Keep credit card balances low. Aim to keep revolving balances below 30% of your total credit limit. High balances can hurt your credit utilization ratio, which factors into your score.
  • Limit credit inquiries. Each time you apply for new credit, it can temporarily ding your score. Only apply for new credit accounts when truly needed.
  • Check your credit reports regularly. Get free copies of your reports from the major bureaus annually and scan for any errors that should be disputed and corrected right away.
  • Build a credit mix. Having different types of credit like loans, credit cards, etc. can help your score compared to having only one type of credit.

 

By focusing on building a strong credit history over time, self-employed borrowers can demonstrate their creditworthiness to lenders and increase approval odds when applying for an auto loan.

 

Types of Lenders for the Self-Employed

When you’re self-employed, finding the right lender that understands your unique financial situation is crucial for getting approved for a car loan. Fortunately, there are several types of lenders in Canada that cater to non-traditional borrowers like the self-employed.

 

Private Lenders

Private lenders, also known as alternative or subprime lenders, are often more willing to work with self-employed individuals than traditional banks. They understand that your income may fluctuate, and they’re more focused on your overall ability to repay the loan rather than strict employment requirements. Private lenders typically have more flexible underwriting criteria and may consider factors like your credit score, down payment, and assets.

 

Credit Unions

Credit unions are member-owned, not-for-profit financial institutions that tend to be more flexible and personalized in their lending practices. Many credit unions in Canada have programs specifically designed for self-employed borrowers, recognizing the challenges you face in proving your income. They may be more willing to consider alternative forms of income documentation and work with you on a case-by-case basis.

 

Online Lenders

Online lenders have disrupted the traditional lending industry by using technology and data-driven algorithms to assess borrowers’ creditworthiness. Some online lenders specialize in serving the self-employed community, using innovative methods to evaluate your income potential and overall financial health. They may consider factors like your business’s revenue, cash flow, and industry trends, in addition to your credit score and other traditional metrics.

 

By exploring these types of lenders, you’ll increase your chances of finding one that understands the unique challenges of being self-employed and is willing to work with you to get approved for a car loan.

 

Getting Pre-Approved

One of the smartest moves you can make as a self-employed car buyer is to get pre-approved for an auto loan before you start shopping. Pre-approval gives you a better sense of your approved loan amount and interest rate, allowing you to set a realistic budget. It also saves you from having your credit checked repeatedly by different lenders.

To maximize your chances of getting pre-approved when self-employed, be prepared to provide detailed documentation of your income and expenses. Lenders will want to see at least two years of tax returns, profit and loss statements, bank statements showing income deposits, invoices for work completed, and a list of your current business assets and liabilities.

Having this paperwork ready upfront shows you are serious and responsible. It also gives the lender confidence that you have sufficient, stable income to make the loan payments. Getting pre-approved also allows you to get a head start on rate shopping across multiple lenders to find the best deal available given your credit profile.

Once pre-approved, you can walk into the dealership as a cash buyer. This gives you more negotiating power and lets you focus solely on getting the vehicle you want at the best possible price. Just be sure the pre-approval is valid for at least 30-60 days so you have enough time to find the right car.

 

Down Payment Impact

One of the most effective strategies to boost your approval odds when seeking a car loan as a self-employed borrower is to make a sizable down payment. Putting down 20% or more of the vehicle’s sale price instantly reduces the lender’s risk exposure and demonstrates your commitment to the loan.

Lenders view a larger down payment favorably because it:

 

  • Lowers the total amount you need to borrow
  • Gives you an equity stake in the vehicle from day one
  • Shows you have funds available to cover payments
  • Decreases the risk of going upside-down on the loan

 

While scraping together 20% or more for a down payment can be challenging, it’s well worth the effort. Start by setting a realistic savings goal based on your desired vehicle’s expected price range. Implement strategies like temporarily reducing expenses, picking up a side gig, or diverting income from your self-employment earnings.

Consider opening a dedicated high-yield savings account and automating transfers from your main bank account. Small, consistent contributions over time can build up faster than you’d expect. Selling valuable items you no longer need is another way to accumulate down payment funds quickly.

Don’t underestimate the power of a large down payment when self-employed. It could be the deciding factor that gets you approved for an affordable car loan on terms you can manage successfully.

 

Co-Signers and Guarantors

One strategy that can significantly improve your chances of getting approved for a car loan as a self-employed borrower is enlisting a co-signer or guarantor with good credit. A co-signer is someone who agrees to share equal responsibility for repaying the loan if you default. A guarantor, on the other hand, agrees to repay the loan if you are unable to.

Both co-signers and guarantors essentially use their creditworthiness to reduce the risk for the lender. Lenders feel more confident extending credit when there is a well-qualified second person on the loan who can cover the payments if needed. This can make the difference in approval, especially if your credit score or income documentation is lacking.

However, it’s crucial to understand the risks involved for the co-signer or guarantor. They are legally obligated to make payments if you miss any. The loan will show up on their credit report, and missed payments will damage their credit score. The lender can also pursue legal action against the co-signer or guarantor to recover any losses from defaulting on the loan.

For this reason, you should only ask someone you fully trust and who understands the responsibilities they are taking on. Typically co-signers are spouses, partners, parents, or other close family members. Make sure they review and understand all the loan terms before agreeing. You’ll also need to make them aware of your financial situation so they can assess the risk level involved.

Getting a co-signer or guarantor is not a workaround to be taken lightly. But when used responsibly by a well-qualified second party, it can provide the credit enhancement needed to secure an affordable car loan when you’re self-employed.

 

Getting Around Employment Requirements

One of the biggest hurdles when trying to get approved for a car loan while self-employed is meeting stated employment requirements at some lenders. Many traditional banks and auto financing companies have policies requiring you to be a salaried employee with steady paychecks. As a self-employed individual, you’ll need to get creative to satisfy these criteria.

The key is providing ample documentation that proves the viability and income-generating potential of your self-employment situation. This could include:

 

  • Business registration documents and licenses
  • Contracts or agreements with major clients
  • Profit and loss statements from an accountant
  • Bank statements showing regular business income deposits
  • Income projections if your business is newly established

 

Essentially, you need to demonstrate that your self-employment equates to a stable “job” that will allow you to comfortably make loan payments. Having two or more years of self-employment history under your belt makes this much easier.

Another strategy is seeking out lenders that use more flexible approval criteria beyond just looking at W-2 employment. Local credit unions, online lenders, and certain “sub-prime” auto financing companies are more open to self-employed borrowers if you can make a strong case for your income situation.

 

Buy Here Pay Here Dealers

For self-employed individuals with poor credit, “buy here pay here” (BHPH) car lots can provide an alternative path to financing. These dealers handle the lending process in-house, essentially acting as both the car seller and lender.

The main advantage of BHPH dealers is that they are more willing to work with buyers who have bad credit, little credit history, or untraditional income situations like self-employment. Since they keep the loan and payments in-house, BHPH dealers have more flexibility in approving buyers that traditional lenders would reject.

However, this flexibility comes at a cost. BHPH loans tend to have much higher interest rates, hefty down payments, shorter loan terms, and older, higher-mileage vehicles to choose from. You’ll also be limited to that dealer’s inventory, which may not include your ideal vehicle.

Additionally, BHPH dealers often require borrowers to make bi-weekly or semi-monthly payments in person, rather than the traditional monthly payment schedule. Missing even a single payment can quickly lead to repossession of the vehicle.

For self-employed buyers with poor credit who can’t get approved anywhere else, BHPH dealers provide a way to get into a vehicle. But the high costs, risks, and potential for predatory lending mean they should only be used as an absolute last resort after exhausting other options.

 

Leasing Instead of Financing

For some self-employed individuals in Canada, leasing a vehicle can be an easier option than financing a car loan. Leasing requirements are often more flexible when it comes to income verification and credit history. Many leasing companies focus more on your overall financial standing rather than just your employment status.

The typical lease requirements for self-employed applicants include:

 

  • Proof of income through tax returns, bank statements, and financial documents
  • A minimum credit score, usually around 650-680
  • Enough income to reasonably cover the monthly lease payments
  • A down payment, which can be smaller than for financing

 

By leasing, you avoid dealing with stricter income requirements for full vehicle financing and ownership. Leases have no obligations after the term ends beyond fees for excess mileage or damage. You simply return the vehicle or can opt to purchase it at the residual value.

However, leasing does come with limitations like mileage caps and the inability to modify the vehicle. You also don’t build any equity. For self-employed drivers who need flexibility and lower payments, leasing provides an alternative path to driving a newer vehicle while avoiding lengthy loan commitments.

 

Getting Additional Documentation Ready

Beyond proving your income and establishing a solid credit history, self-employed car buyers in Canada will likely need to provide some additional documentation to lenders. Be prepared to submit the following:

 

  • Proof of residency, such as a utility bill, rental agreement, or mortgage statement in your name showing your current address
  • Government-issued photo ID like a driver’s license or passport to confirm your identity
  • Proof of business registration and licensing, which could include articles of incorporation, business license, GST/HST number, etc.
  • For newer businesses, a viable business plan and financial projections to demonstrate future income potential
  • Vehicle particulars like make, model, year, and asking price if you’ve already selected a specific car to purchase

 

Having this documentation ready upfront can help streamline and speed up the car loan approval process when self-employed. Lenders want to see you’re a legitimate business owner with the means and responsibility to make your loan payments.

 

Mistakes to Avoid When Getting a Car Loan as a Self-Employed Canadian

Even with a solid income and credit history, self-employed Canadians can make costly missteps when applying for an auto loan. Steering clear of these common pitfalls can greatly improve your chances of approval:

 

Cash Damming – Depositing only a portion of your business income into your bank account while keeping the rest as cash on hand is a red flag for lenders. They want to see all of your income properly documented and deposited.

Too Many Recent Credit Checks – Each application for new credit results in a hard inquiry on your credit report. Having too many of these in a short period makes you look desperate for financing and could lower your credit score.

Applying at the Wrong Places – Not all lenders are equipped to properly evaluate self-employment income. Applying at banks or dealerships without stated self-employed lending programs is often a waste of time.

Exaggerating Your Income – Lenders have ways to verify your stated income, so inflating the numbers is unwise. If they catch you in this lie, you’ll be automatically declined and could face fraud accusations.

Underestimating Vehicle Costs – Make sure to properly budget for insurance, gas, maintenance, and other vehicle expenses. Overextending yourself on just the loan payment is a recipe for default.

 

By avoiding these key mistakes, you present yourself as a much lower risk borrower and give yourself the best possible shot at car loan approval despite being self-employed.

 

Tips from the Experts

When seeking a car loan while self-employed in Canada, it’s wise to heed advice from experts who have helped many borrowers in your situation. Here are some additional tips from financing pros:

 

“Get pre-approved before going to the dealership,” advises Sara Williams, Senior Loan Officer at FinanceHub Credit Union. “This allows you to shop as a cash buyer and negotiate the best price, while already knowing what loan amount you qualify for based on your income documentation.”

Martin Oakley, President of OakleyLendingGroup, stresses building an emergency fund: “Even with proof of income, lenders worry that self-employment income can fluctuate. Having 3-6 months’ worth of loan payments saved up can help offset that risk in the lender’s mind.”

According to Jack Chen, Financing Manager at CanadaWheels, “Don’t be discouraged if you get denied for a loan at first, even if your credit is good. We see many self-employed borrowers get approved on their second or third try, as they find a lender who is more flexible with income documentation.”

Patience is also key, says Lesley-Ann Woodsworth of LendWise Financial Group: “Gathering all the paperwork a lender needs for the self-employed can take time. Don’t rush the process. Submitting an incomplete application is a quick way to get rejected.”

Lastly, Matt Robinson at CanadaDrive Solutions recommends, “Consider getting a co-signer if your credit score is under 650 or you’ve been self-employed for less than two years. A co-signer can minimize the lender’s risk until you’ve built a stronger credit and income profile.”

 

Conclusion

Getting approved for a car loan while self-employed in Canada is absolutely possible, but it does require some extra effort on your part. By taking the right steps to document your income, build a strong credit profile, shop around for the best lenders, and leverage options like higher down payments or co-signers, you can overcome the unique challenges of being self-employed.

The key is preparation – have your financial documentation ready to go, understand what potential lenders need to see, and anticipate the extra requirements that come with being your own boss. It’s also crucial to work with lenders experienced in self-employed car financing, as they understand the nuances involved.

While the process may take more time and paperwork, don’t get discouraged. Millions of hard-working, self-employed Canadians successfully obtain auto financing every year when they demonstrate their creditworthiness and income stability. With perseverance and the right approach, you too can get behind the wheel of your next car, truck, or SUV – all while maintaining the freedom and flexibility that comes with being self-employed.

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Questions About Getting a Car Loan When Self-Employed

As a self-employed person in Canada, you can get a car loan but there are some extra steps you need to take compared to someone with a regular full-time job. Lenders need proof that you have a steady income before they will approve a loan.

 

The keys are showing consistent income over time, having a good credit score, providing proper documentation, and potentially putting down a larger down payment. Many mainstream banks make it difficult to get approved but there are alternate lenders that specialize in loans for self-employed borrowers. As long as you take the right steps, you should be able to finance the car you need.

As a self-employed borrower seeking a car loan in Canada, you typically need to provide more documentation than a traditionally employed applicant. Here are some of the key documents lenders may request:

 

– Two years of complete personal and business tax returns showing steady income

– Proof of business registration and legal business name

– Bank statements proving cash flow for at least 6 months

– A business plan and financial projections if you have been self-employed less than 2 years

– Receipts for business expenses if relevant

– A recent credit report showing a good score of at least 650+

 

Having clean, well-organized documentation that clearly demonstrates consistent income over time is key to getting approved. Work with your accountant to ensure your paperwork is thorough before applying.



Most lenders have a minimum credit score requirement between 650 to 700 for approval on a self-employed car loan application. The higher your score, the better your chances. Anything below 650 will be challenging to get approved and will come with higher interest rates if you do qualify.

 

Aim to improve your score over 700 before applying by paying all bills on time, keeping credit card balances low, avoiding applying for too much new credit at once, and correcting any errors on your report. This will put you in a strong position to not just get approved but also get decent interest rates. Having an exceptional score can sometimes help compensate for other deficiencies in your application.



While zero down car loans were common before the financial crisis over a decade ago, qualifying for $0 down on a self-employed car loan today is very rare. Most lenders now require a minimum down payment of at least 10-20% for self-employed applicants to get approved.

 

The main barrier is that lenders view self-employed borrowers as riskier than traditionally employed applicants. By putting down a substantial down payment, you reassure the lender that you are financially committed to repaying the loan. If you have an exceptionally strong application and high credit score, you may find some exceptions. But in most cases, plan to have at least 10-15% saved as a down payment for the best approval odds on a self-employed car loan.

As a self-employed borrower, interest rates on a car loan are typically 0.5% to 2% higher than traditional applicants, assuming you qualify for approval. Here are some sample rates to expect based on credit score:

 

– 650-699 credit score = 5-8% interest

– 700-749 credit score = 4-6% interest

– 750+ credit score = 3-5% interest

 

The higher your credit score, the better rate you can qualify for. Anything under 650 will mean double-digit interest rates around 15-20% or higher. Shop around with alternative lenders specializing in self-employed loans to maximize your chance at the best possible rate. Non-prime lenders are more flexible but the trade-off is higher rates.

The #1 way lenders evaluate risk and repayment ability on self-employed applicants is looking at consistent income over time. Rather than relying on a letter of employment or recent pay stub, you need to provide documentation directly showing earnings. Options include:

 

– 2 years of complete personal/business tax returns

– 6-12 months of bank statements showing cash flow

– Invoices and records of payment for services provided

– Profit & loss statements demonstrating revenues and expenses

– Projections backed by contracts or purchase orders for future work

 

The more documentation from multiple sources you can provide to prove stable income over the last 2+ years, the more confidence lenders will have approving your application.

Banks and mainstream dealerships typically have the strictest approval criteria for self-employed car loans in Canada. Specialized subprime lenders with dedicated self-employed loan programs often offer higher approval chances. The trade-off is higher interest rates.

 

To maximize your chances while still getting reasonable rates, apply with multiple lender types – ideally get pre-approved before visiting dealers. This allows you to compare options and terms to find the optimal lender willing to work with your unique situation. Having a pre-approval also gives you negotiating leverage when it comes time to finalize the loan at the dealership.

Utilizing some best practices can help tip the scales in your favor for getting approved for a self-employed car loan in Canada:

 

– Shop for cheaper vehicles to lower the amount you need to finance

– Put down at least 15-20% as a down payment

– Ask a family member with good credit to co-sign on the loan

– Clean up your credit report and aim for 700+ score

– Highlight future income potential and contracts in your application

– Write a business plan with financial projections

– Overdocument income proof from multiple sources showing stability

– Be conservative with expenses and don’t max out affordability metrics

– Get pre-approved before visiting dealerships

 

Following these tips demonstrates to lenders you are financially responsible and focused on repaying the loan. This can help offset the perceived riskiness of self-employed applicants in Canada.

As a self-employed borrower with a car loan in Canada, any vehicle expenses associated with driving for business purposes may be deductible on your taxes. This includes expenses like:

 

– Lease payments or interest/fees portion of loan payment

– Gas and oil costs

– Maintenance and repairs

– Insurance premiums

– License and registration fees

– Car wash and cleaning

– Parking and tolls

 

To qualify for tax deductions, you need to keep detailed mileage logs separating personal and business driving as well as receipts for eligible expenses. Work with your accountant to claim all applicable deductions and optimize your tax position.



Most lenders have set policies requiring self-employed borrowers to be established for 24 months. This means being able to document at least 2 years of income from self-employment through tax returns, bank statements, and other supplemental documentation.

 

However, some specialized non-prime lenders are more flexible with proof of 12 months of self-employment history. And if you have stellar credit, strong income, and put down a large down payment, exceptions may occasionally be made for less than 24 months. But the standard in Canada is typically 2 years minimum to satisfy most car loan approval criteria as a self-employed applicant.

Yes, you can trade in your current paid off car or financed vehicle as part of getting approved for self-employed car financing in Canada. The trade-in value becomes an additional down payment that lowers the amount needing to be financed.

 

Just be sure there is positive equity in the trade-in. You don’t want to roll over negative equity from the old loan into the new loan as that raises the amount needing to be financed and can hurt your approval odds. As long as your trade has decent market value beyond what you still owe, it can be a great way to supplement your down payment as a self-employed applicant.



It is generally recommended not to apply for any new credit lines (credit cards, loans, etc) for 6 months to 1 year before seeking approval on a self-employed car loan application. Each hard credit check can modestly ding your score and lenders want to see stability.

 

If you do apply for other credit, wait for it to appear on your report and for your score to adjust before proceeding with the car loan. Avoid maxing out new credit either. Follow this advice to ensure your profile looks healthy and stable when the lender reviews it to make an approval decision. Too much recent activity can raise questions.

If you have been self-employed for less than 2 years, you face a tougher task for qualification but still have options:

 

– Leverage previous W2 jobs along with current self-employment

– Provide as much documentation as possible – tax returns, bank records, invoices

– Highlight contracts and purchase orders for future work

– Put down an exceptionally large down payment if possible

– Bring on a co-signer with strong income and credit history

– Seek lenders that offer startup self-employed loan programs

– Talk to brokers familiar with placing deals for less tenured self-employed borrowers

 

Finding the right lender with programs catering to your situation can make approvals achievable even with under 24 months of history. Shopping brokers and being willing to pay higher rates may be necessary for those with shorter durations of self-employment.



If you have bad credit (below 650 score), recently declared bankruptcy, or have no prior auto loan history – approval on a self-employed car loan application can be very difficult but is still possible in some situations. Here are tips to maximize your chances:

 

– Wait at least 12-24 months after bankruptcy discharge

– Re-establish positive payment history since bankruptcy

– Focus on rebuilding credit score over 650+

– Shop specialized subprime lenders willing to take risks

– Have a large down payment saved up

– Provide extensive income documentation

– Bring on a co-signer if possible

– Expect very high-interest rates if approved

 

Having adverse credit makes it much harder combined with being self-employed but lenders exist that may work with you. Just have realistic expectations on the terms and be willing to take extra steps to offset the risk.

If you get declined on a standard self-employed car loan application, you still have some options to get the vehicle you need:

 

  1. Apply with alternate subprime lenders willing to take more risk
  2. Ask dealers about in-house financing options
  3. Improve your credit score and income proof for re-application
  4. Lower the price range of vehicles you are shopping
  5. Bring on a co-signer to supplement qualifications
  6. Increase your down payment amount significantly
  7. Provide more documentation proving income stability over 2+ years
  8. Wait a year or more to re-apply once income is higher

 

Don’t get too discouraged by initial denials. Tweaking your approach, enlisting help, and persisting with the right lenders can still make self-employed auto financing achievable in Canada despite the initial rejection.

If your self-employed car loan application is questionable and could go either way, applying for pre-approval is highly recommended before visiting dealerships. This allows you to learn ahead of time if you have a decent shot without impacting your credit further via additional hard checks.

 

That way you either get approved, giving you confidence and negotiating leverage at the dealers. Or if declined for pre-approval, you can refine your application and improve certain aspects before submitting again for an official approval through the dealer.

 

Pre-approval provides valuable insight without risk when your application is marginal or questionable based on your self-employed status and income qualifications.

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