Yesterday, we looked at some of the first steps in dealing with vehicle repossession. Now, let’s look at some of the other challenges potentially standing in your way. There are going to be some specific requirements you must meet before slipping behind the wheel of a car. Let’s look at those, based on this consumer comment:
“My vehicle just got repossessed on Monday. I have had previous vehicle loans before and never had any issues. I am starting new job [soon] that pays $17 hour 40 hours a week and will need a car. I did have a bankruptcy back in 2012 Thanks”
Some of the obstacles this consumer is facing have to do with specific requirements of bad credit auto loans, specifically related to job and income. Here, we outline the three key factors subprime auto lenders use to qualify someone—ability, stability and willingness to pay.
Ability and Stability to Get Financed
In the comment, the consumer is beginning a job that will help him meet the income requirements set by most subprime lenders. This shows his ability to pay for a car loan. In order to qualify for a subprime auto loan, a dealer or lender will usually require a minimum gross (pre-tax) monthly income of $1,500 to $1,800 per month.
Based on the comment, this customer stands to make approximately $2,945 a month. We find this by multiplying pay per hour times the number of hours per week times the approximate weeks in a month. Here’s our formula: 17*40*4.33=2,944.4. Once he begins his new job, it looks like this consumer will make enough money to qualify for an auto loan.
On the downside, this customer has not started his job, so, currently he may not be able to provide proof of income. This new job, and previous ones, will be looked at for stability—a lender will look at employment history and how stable the current income is. As a consumer with bad credit, it can help to have at least 30 days of current, garnishable wages. For proof, you will need to provide a lender with a copy of your most current check stub(s) showing year-to-date income.
Willingness to Pay on Auto Financing
Another key factor lenders use is willingness to pay. This may become an obstacle for the customer in our example—due to both the very recent repossession and former bankruptcy. These factors may be overcome under the right circumstances, but both will be visible as part of his credit history.
Both of these marks against your credit stick around for a good long while. Repossession—even if you take the steps outlined in Pt. 1—stays on a consumer credit report for seven years, though the impact lessens over time. Because of this, a good recommendation is to wait a year after repossession to apply for auto financing again.
In his comment, the customer mentioned having a bankruptcy in 2012, so, depending on what type of bankruptcy was filed, the mark could reflect on his credit history for several years. A Chapter 7 bankruptcy typically takes three to four months to complete and will stick with you for 10 years from the filing date. A Chapter 13 bankruptcy has either a three- or five-year repayment plan, and stays on your credit for seven years.
Other Requirements and Stipulations
Additionally, a lender will look at two other things to determine your auto loan, your debt-to-income ratio (DTI) and your payment-to-income ratio (PTI).
Earlier, we mentioned that it looks like the customer will meet the minimum income requirement for most lenders. Now, that income earned will be compared to income owed each month, to determine DTI.
Here, a lender adds up all your monthly debt to be paid—rent, mortgage, credit cards and other debts for example—and divides that sum by your gross monthly income. Expenses such as gas, groceries, utilities and taxes are generally not included in the calculation. Typically, subprime lenders will allow a borrower a DTI of 50 percent, with the potential car and insurance payments factored in.
A payment-to-income ratio compares how much you earn each month to how much your car payment will be. This is done by dividing your estimated car and insurance payment by your gross monthly income. The resulting percentage is your PTI. A lender will typically not allow a PTI to exceed 15 to 20 percent. The lower your resulting percent is for both DTI and PTI ratios, the better you will look to potential lenders.
On top of all the things we have already mentioned, you will also have to provide the following documentation:
- Proof of residence—the ability to show a stable residence history will show lenders that you are less of a flight risk, which would make it difficult to repossess a vehicle if you stop paying on the loan.
- A working phone—this is an absolute requirement for subprime lenders. A borrower must possess either a landline or a cell phone plan from a national carrier; pre-paid plans are not acceptable.
- References—a lender will typically require the names, addresses and phone numbers for at least six people, who do not live at the same residence as the borrower. These can be friends, family members or co-workers, but they must be valid contacts.
The Bottom Line
No matter if your situation is similar to our example, or if you have a different set of circumstances that put you in a bad credit situation, Auto Credit Express can help. We have an extensive network of dealers who have the resources for lending to people with credit challenges.
Let us help you get started toward your next vehicle today. Simply fill out our free online auto loan request form, so we can match you with one of our dealers to begin your process.