If you need to finance a car with bad credit, there are lenders out there that may be able to work with your situation. These special finance lenders will look at factors beyond your credit rating in order to approve you for an auto loan.
Of course, these lenders still have requirements that applicants must meet in order to be approved. For example, you will probably be expected to provide proof of a qualifying income. Also, your debt to income (DTI) ratio will be considered. "Debt to income" refers to the percentage of your total monthly income that is allocated toward bills. And when it comes to getting approved for a bad credit auto loan, the lower your DTI ratio is, the better your chances will be.
Understanding Why Your DTI Ratio is Important
The DTI ratio requirement isn't just an arbitrary rule imposed by lenders. It exists to protect bad credit buyers from taking on higher monthly bills than they can handle. It stands to reason that you will be much more successful with an auto loan if your car payment fits within your budget. This is why lenders place limits on how much debt subprime applicants are allowed to have.
Ideally, your DTI ratio (including your new car loan and car insurance) should be 40% or less. Most special finance lenders won't approve an applicant if their DTI ratio is over 50%. Again, this includes your current bills plus the new auto loan your are requesting. This is why it is in your best interest to purchase an affordable car as opposed to an expensive vehicle that would come with a higher monthly payment.
In fact, if your credit score is on the low side, lenders will probably put a cap on the size of your car loan (called a "payment to income" or PTI ratio). Typically, if your score is 530 or below, your monthly payment must not exceed 15% of your gross (pre-tax) income. However, if your FICO score is at least 640, you may be approved for a car payment that is as much as 20% of your monthly gross income.
Preparing Your DTI Ratio for Auto Loan Approval
If you don't need to buy a vehicle right away, it will be worth your time to take stock of your situation. Before applying for a car loan, it's always a good idea to check your credit reports and score. Even if you're pretty sure that your credit is bad, you should know the extent of the damage. Checking your credit reports will also give you a chance to find and dispute any errors.
Once you know your current credit score, you should calculate your DTI ratio. This involves relatively simple math. Just add up all of the bills that you pay each month and divide the amount of your gross monthly income by this total. If you find that your DTI ratio exceeds 50%, you may need to make some adjustments before seeking your loan.
For example, if you have unpaid personal loans or high credit card balances, paying these off will help your approval chances. Basically, anything that you can do to reduce your monthly bills will improve your DTI ratio. You will also find that freeing up more of your income will make it easier to make your car payment. And remember that you'll need room in your budget to pay for insurance and cover vehicle maintenance costs and repairs.
If you have time, you may want to see if there's anything you can do to boost your credit score. Paying off high credit card balances is a good way to do this. Also, if you find any mistakes on your credit report(s), they might be pulling your score down. Disputing any errors and having them removed could bring up your rating.
Auto Loan Assistance for Bad Credit Car Buyers
If you need to finance a car with bad credit right now, Auto Credit Express can help. We understand that you can't put your life on hold while you're repairing your credit. You need to get back on the road, and we're willing to do what we can to make this happen.
We'll match you with a dealership in your area that can give you a better chance at an auto loan approval. And it costs nothing to apply with us. Our service also comes with no obligations, so you have nothing to lose except more time without a car. Go ahead and fill out our simple and secure online application to get started today.