When you’re working with a subprime lender to finance a vehicle with bad credit, there are certain qualifications you have to meet in order to get approved. These lenders look at a number of factors in addition to your credit score to ensure that you can afford a car loan. One of these factors is your debt to income (DTI) ratio, and we can show you how to calculate yours.
Why Your Debt to Income Ratio Is Important
Your debt to income ratio tells a lender how much available income you have each month. If you don’t have enough income left after paying your bills, it can be difficult to qualify for a bad credit auto loan. This is especially true if you’re a bad credit borrower.
It’s important that your vehicle payment fits comfortably into your budget. Even lenders want you to be able to afford your car, as it's best for both involved parties. When it comes to budgeting for an auto loan, your DTI ratio is important, but it’s only one piece of the puzzle.
Let’s take a look at two calculations that go hand in hand: your debt to income ratio and your payment to income (PTI) ratio.
Calculating Your DTI and PTI Ratios
When it comes to your debt to income ratio, lenders place a cap of 45% to 50% on bad credit borrowers. This means that if more than half your income is already being used for bills, you likely won't get approved. In fact, the lower your DTI ratio, the better.
To calculate your DTI ratio, add all of your monthly bills together, including an estimated car loan and insurance payment, and divide the total by your pre-tax monthly income. Convert the number to a percentage, and there you have it.
For example: If your total monthly bills are $980 and your gross monthly income is $2,600, then your DTI ratio is 37.7% (980 divided by 2,600 equals 0.377, or 37.7%).
Meanwhile, your payment to income ratio shows how much of your pre-tax monthly income is needed for your auto loan payment. Typically, lenders don’t allow a payment to be more than 15% to 20% of your gross income. Just like DTI ratio, the lower your PTI ratio, the better.
Finding your PTI ratio is also an easy calculation. All you have to do is divide your estimated monthly car loan payment by your pre-tax monthly income.
For example: If your estimated payment is $400 and your monthly income is $2,600 a month, then your PTI ratio is 15.4% (400 divided by 2,600 equals 0.154, or 15.4%).
When you’re shopping for a vehicle, you can set your budget by determining your target PTI ratio ahead of time. Simply multiply your gross monthly income by 0.15 and then by 0.20. This gives you the range of the maximum monthly payment subprime lenders typically allow.
Completing the Auto Loan Puzzle
Your DTI and PTI ratios are just two pieces of the auto loan approval puzzle, but knowing them goes a long way toward helping you budget. Now that you know what lenders are looking for, you can begin looking for a dealership that meets your needs.
If you’re struggling with credit issues, you’re going to need a special finance dealer with the type of lenders that can finance people in different situations. This is where Auto Credit Express can help.
We work with a nationwide network of special finance dealerships, and want to connect you with one near you. This saves you the time and hassle of driving all over looking for help on your own. Fill out our no-obligation car loan request form, and we’ll get to work for you!