Income Rules for Poor Credit Car Loansby Steve Cypher on Monday, December 3rd, 2012
Car buyers that have experienced credit problems should have an understanding of how subprime auto lenders determine if the income of applicants will qualify them for an auto loan.
At Auto Credit Express we know how they do it because we’ve spent the last two decades helping auto shoppers with poor credit scores find dealers for their best opportunities at approved auto loans. Our website – complete with a resources section – is even designed so that applicants can understand how BHPH car loans work as well as gain an understanding of today’s topic, how higher risk auto lenders budget applicants using their income requirements.
Debt and income ratio
After receiving a credit application from a participating franchised new car dealer (most subprime auto lenders don’t loan directly to customers), one of the first things they’ll do is compute that individual’s debt to income ratio (DTI).
You can, and should, do this yourself. The reason you should do this is simple: if this ratio is too high, you’ll not only be wasting both the dealer’s and lender’s time, it will result in at least one inquiry on your credit reports that will end up lowering your credit scores.
Here’s how it’s done:
Begin by adding up all your regular monthly bills such as mortgage or rent payments, credit cards, other loan payments, average utility payments and anything else (student loans, child support, etc.).
Next, divide this sum by your gross monthly income (that is, what you’re paid before taxes and other deductions are taken out). This will give you your monthly debt percentage. Most non-prime lenders will cap your total monthly debt (including a car payment and auto insurance) at 50% of your monthly gross income.
At the same time, most of these lenders will not want your car payment (also including car insurance) to exceed 15% of that same gross monthly income figure. This is called the payment-to-income (PTI) ratio.
So what does this mean?
It means, for example, that with a gross monthly income of $3,000, the combined car and insurance payments cannot exceed $450. Since most lenders will assume a budget of $100 per month for car insurance, this leaves a budget of $350 (or lower) for a maximum car payment amount.
Your total budget
Those prior amounts notwithstanding, when you outline your own vehicle budget be sure to include expenses for gas as well as any normal maintenance costs – as well as funds for any unexpected repairs. This, by the way, brings up another important point.
If you are considering purchasing an “as-is” used car without a service contract that covers the entire loan term, it’s a good idea to plan on setting money aside each month to cover the possibility of repairs.
If that sounds like too much of a hassle then do yourself a favor, buy one, and roll its cost into the monthly payment. By purchasing a service contract you’ll be guarding against most unforeseen expenses caused by mechanical problems. Just be sure to shop around for pricing so you know you’re being offered a fair deal.
The Bottom Line
By understanding the importance of both DTI and PTI ratios and knowing how to compute them, credit-challenged applicants can judge for themselves it they meet at least these two requirements for poor credit auto loans.
If this is the case, the next step is applying at Auto Credit Express where we specialize in helping applicants with car credit issues find dealers for their best chances at auto loan approvals.
So if you’re ready to reestablish your auto credit, you can begin now by filling out our online auto loans application.