Having a down payment, a qualifying income, and enough room in your budget are all important aspects of being eligible for an auto loan. We use a consumer’s question and information to look at his situation and see if they may qualify for a bad credit car loan.

Consumer Q&A

Here at Auto Credit Express, we work to match borrowers to dealerships with the lending options they need for their credit situation. Every month, we get a lot of questions from consumers which we’re happy to answer.

One consumer, we’ll call him John, is wondering if it's possible to get approved for an auto loan. John wrote:

“Looking to get a $24-25k loan. Monthly gross income is $4-6K. I have zero credit and am putting down $10-12k on a 2020 vehicle.”

First, we’re not a lender, so we wouldn’t be able to tell John whether or not he could be financed. However, from this statement, we can see that their down payment amount is quite large, and is likely to meet the requirement of most subprime lenders. Their monthly income is also above the typical minimum amount required for a subprime car loan, although we don’t know the type of income he earns.

John also said that he has “zero credit,” which likely means he's a new borrower. Someone with no credit likely has no credit score or one that's toward the lower end of the FICO credit scoring range, which runs from 300 to 850.

Here’s a big issue that sticks out to us: as stated, the consumer wants an auto loan around $25,000 – with a $12,000 down payment, that's a $13,000 loan. However, if he meant that he was looking for a $37,000 vehicle (financing for $25,000), that’s an entirely different story.

Since we don’t have all the information, we’re going to assume that John is looking to finance a car with a selling price of $25,000, financing $13,000, and putting down $12,000. Now that we have the price of the vehicle is established, let’s break this question down and see how it fits into a subprime auto loan and the general requirements for special financing.

Requirements of Subprime Auto Loans

Subprime simply means bad credit, and people who have never borrowed before often have to start here since they have lower or nonexistent credit scores. For many consumers, getting into a subprime car loan can be a way to jump-start their credit history and get into the vehicle they need.

A subprime lender usually requires a borrower to have a minimum monthly income of around $1,500 to $2,500 before taxes. John appears to have enough income to meet the minimum income requirements of most subprime lenders. If he makes between $4,000 to $6,000 a month and that income can be proven with computer-generated check stubs, it’s likely that he’s on his way to being approved for subprime auto financing.

Subprime lenders also typically require a down payment amount of at least $1,000, or 10% of the selling price, and John meets this as well. If he’s looking to put down $12,000 on a $25,000 car, that’s a nearly 50% down payment. Large down payments are a great way for bad credit borrowers to lower their interest charges, since people with lower credit scores are more likely to qualify for higher interest rates.

Besides meeting the income and down payment requirements, John also needs to have a valid driver’s license and a working cell phone or landline phone in order to qualify for financing. There's another requirement that we’re not sure if John meets quite yet, though.

Debt to Income Ratio and Auto Loans

We’re not sure John meets the debt to income (DTI) ratio requirement. Subprime lenders use the DTI ratio calculation to see how much available income you have each month after bills that can be used to pay for the vehicle.

You and John can calculate your own DTI ratio right at home. Simply add up your estimated auto loan and insurance payment plus all of your regular monthly expenses (excluding utilities), and divide the sum by your monthly pre-tax income.

John stated that his monthly income was between $4,000 and $6,000, so we’ll just say $5,000 for simplicity's sake. Let's say that he pays somewhere around $2,000 each month in other loan payments, credit card payments, and household bills. Car lenders estimate that borrowers pay $100 each month for full coverage insurance, and based on the price of the vehicle that John is looking to buy, his payment is likely to be around $350 if he goes for a 48-month term with a 12% interest rate (the average for bad credit consumers).

That’s $2,450 for all monthly expenses, and his income is $5,000 a month. Let's look at his DTI ratio:

  • $2,450 divided by $5,000 = 0.49, or 49%

A subprime lender’s maximum DTI threshold is generally around 45% to 50%. Auto lenders use this calculation to see how much of your income is available since they don’t want to approve anyone that’s already overextended, or is going to be overextended with car expenses.

Based on the estimates, John may or may not qualify for subprime financing. We don’t know what his actual expenses are, but if they’re less, then he could be meeting the DTI ratio requirement needed to get approved for special financing.

We can’t say for certain that John is eligible for a subprime auto loan without knowing all of the specifics, but it looks like it may be worth his time to look for a special financing dealer to get the process started.

The Next Step in Getting a Car Loan

One of the biggest hurdles that new borrowers and bad credit borrowers have to overcome is finding the right lender for their situation. John reached out to us at Auto Credit Express, and we’re glad that he did! Not only can we offer car loan advice, we match consumers to dealerships with special finance departments.

Dealers that are signed up to work with subprime lenders are sometimes harder to locate than traditional lenders, but we want to make it easier to get in touch with them. To get started, fill out our free auto loan request form, and we’ll look for a dealership in your area.