It can be difficult to know where to go for your next car loan after bankruptcy. Many people ask us if a subprime lender is the right choice for their situation, like this consumer:
"I make around $6,600 a month with only one home loan and one car loan, no credit cards, looking to see about qualification, just closed bankruptcy in February."
This borrower seems to have all their ducks in a row, and a subprime lender may be a good choice. Your credit score drops as a result of a bankruptcy being listed on your credit reports, so you aren't likely to qualify with all lenders. However, whether or not you qualify for an auto loan depends on more than just income.
Auto Loan Qualification: Income vs. Spending
Subprime lenders can often help people that are just on the other side of bankruptcy because they realize you're more than a credit score. Because your credit score is diminished after a bankruptcy discharge, they look at additional factors to determine loan approval. Income and spending are two big factors in whether or not someone qualifies for a car loan.
Though specifics can vary by lender, subprime lenders typically require a borrower to have a minimum monthly income of $1,500 to $2,500 before taxes from a single source. But that's just the start of qualifying with your income. The second piece of the puzzle is having enough of your income available to cover your monthly auto loan and car insurance payments.
To find out if you have enough available income lenders do a simple calculation called your debt to income (DTI) ratio. The DTI ratio compares your existing monthly bills to your pre-tax monthly income. Lenders that work with credit-challenged consumers typically don't consider you for financing if your DTI ratio is over 45% to 50%.
Calculating Your DTI Ratio
When our fresh-off bankruptcy borrower needs another car loan, they can calculate their debt to income ratio on their own, and you can follow along. Using their question above as a starting point, let's look at an example of how to calculate the DTI ratio:
To start, add together the amount of their mortgage, existing auto loan, and the insurance cost for each, and then divide that total by their monthly income of $6,600.
Let's imagine they pay $1,700 a month in combined mortgage and homeowners insurance, $875 a month for their existing car loan and auto insurance. This means their total monthly bills add up to $2,575. Divide that by their income, and you get 0.39, or 39%, meaning their DTI ratio is 39%.
Based on these numbers, the borrower should qualify for financing with a subprime lender, because they’re not already using too much of their income. Of course, we don't know what this consumer’s actual spending looks like, so if their debts are more than we imagined, a subprime lender may not be exactly what they need to make another car loan a reality.
Other Options After Bankruptcy
If you're unable to get an auto loan after bankruptcy through a subprime lender, there's one other option you can turn to: buy here pay here (BHPH) dealerships. These dealers provide in-house financing, which means they're the lender, too.
BHPH car lots can be a good place to start if you just need a vehicle to get you through the year, because the dealership's not as interested in the details. In-house financiers typically only need to see that you have enough income to make the auto loan payments, and ask you to provide a down payment, sometimes around 20% of a car's selling price.
These dealers only sell used vehicles, and may require payments more than once a month. Additionally, they don't always perform a credit check, or report your timely payments to the national credit bureaus. So, if you're counting on an auto loan to help you build your credit score, you may not be able to do that at a BHPH lot.
Finding an Auto Loan After Bankruptcy
An auto loan can be a great way to improve your credit score after a bankruptcy, but only if the credit bureaus know about the on-time payments. This is one reason a subprime lender is a good choice for your post-bankruptcy car loan. Finding a subprime lender to work with can be a challenge in itself, though, and this is where we can help.
Auto Credit Express has cultivated a network of special finance dealerships from across the country that are signed up with subprime lenders that work with borrowers in all kinds of credit situations, including bad credit, no credit, and bankruptcy. Don't drive all around town looking for your next auto loan – start here instead. Just fill out our fast and free car loan request form, and it's our pleasure to match you to a dealer in your area.
