If you are in need of a bad credit auto loan, qualifying is not just about how much money you are making, but how much money you are already spending.
Income vs. Debt, Why It Matters
Of course, you need money to pay back a car loan. But lenders not only care about the money you get, they also care about the money that is running out. This is especially true if you are a bad borrower.
If you have a credit score of 660 or less, you most likely qualify for a car loan through a subprime lender. These lenders work through specialized financial traders and help people in unique credit situations get the credit they need.
To do this, in addition to your creditworthiness, they use other factors to ensure that you are eligible for funding. One of the factors that a subprime lender uses to determine eligibility is Debt to Income Ratio (DTI). This tells a lender how much disposable income you have in your budget each month to pay for your car loan and required fully comprehensive insurance.
Lenders calculate your DTI by dividing your monthly recurring debts and payments by your gross monthly income. This way you will get a decimal answer. Once converted to a percentage (by multiplying by 100), subprime lenders can see how much of your income is already being used by your recurring debt.
For example: If your gross monthly income is $ 2,500 and the total of your existing bills is $ 1,200 each month, then 1200/2500 = 0.48 which means your DTI is 48%.
To do this yourself, you need to know how much pre-tax you are making each month, and how much are all monthly loan payments, mortgages (rents), insurance payments, and credit card bills (you don’t have to include living expenses) in your math, like food or utilities ). Don’t forget to include an estimated car loan payment in your calculations.
If you are unsure of how much car loan you might qualify for, you can use online tools to make the math easier.
Why is DTI so important to a subprime lender?
Believe it or not, it is important because they want you to succeed with your car loan. Lenders are unable to get bad deals that a borrower cannot repay. If it did, lenders would lose more than they earn.
To ensure that you are able to repay a car loan, subprime lenders typically require that no more than 45% to 50% of your income be used on your debt. If you already have a lot of payment obligations, chances are you will get into trouble with a car payment if something unexpected happens. Lenders try to help you avoid a car loan default from the start.
Decrease your DTI
Because DTI is such an important factor in making a poor auto loan credit decision, a borrower may meet all of the other requirements set by a lender and still be rejected because they lack sufficient disposable income.
Typically, to qualify for a car loan, subprime lenders must prove that you are making approximately $ 1,500 to $ 2,500 pre-tax monthly income from a single source. Once you have this initial income qualification, you can tell the lender if you have any additional forms of income.
By increasing the amount of income you bring in, you can demonstrate to a lender that you have enough headroom in your budget for car financing. The additional income that can be counted towards your DTI can come from a second job, alimony, child benefit, rental income, or even social security or permanent disability – provided you can show that the income will be retained throughout the life of the loan. This often means presenting award letters, court documents, receipts, bank statements or tax forms to the merchant.
If you don’t have the additional sources of income to replenish your DTI quota, you can always take a look at your monthly expenses and try to cut back where you can.
Building a car purchase budget
It is important that you remain in control of your own auto loan business. A great way to do this is to prepare a budget for your car purchase in advance. Remember that sticker price is only one aspect of the credit process. You can expect more fees to add to your total.
Some of these additional fees are negotiable, e.g. B. Merchant Add-Ons and Document Fees. Others like taxes, titles and royalties are non-negotiable. You can also expect to need a down payment as a bad borrower. Typically, subprime lenders require you to bring in around $ 1,000 or at least 10% of the vehicle’s retail price, sometimes whichever is lower.
Find a loan that works for you
Now that you know that you need to have a little bit of budget in your budget for auto loan approval, you need to find a lender who knows how to work with consumers with credit problems. Subprime lenders are found through specialized financial dealers, but they can be difficult to pick from the crowd.
Instead of looking all over town for a dealer with the right credit resources, start here at Auto Credit Express. For over 20 years, we’ve been connecting less-than-perfect credit borrowers with merchants in their area and wanting to help you too. There is no obligation and the process is quick and free. Fill out our auto loan application form right now and we’ll get to work for you right away.