When you need a bad credit car loan, qualifying isn't just about how much money you make, but about how much money you already spend.
Income vs Debt, Why It Matters
Of course, you're going to need money to repay an auto loan. But lenders aren't just concerned with the money you have coming in – they're concerned with the money that's going out as well. This is especially true if you're a bad credit borrower.
When you have a credit score around 660 or lower, you're most likely to qualify for an auto loan through a subprime lender. These third-party lenders work through special finance dealerships and help people in unique credit situations to get the loan they need.
In order to do this, they use additional factors besides your credit score to ensure you're fit for financing. One of the factors that a subprime lender uses to determine your eligibility is called the debt to income (DTI) ratio. This tells a lender how much available income you have in your budget each month to pay for your car loan and the required full coverage auto insurance.
Lenders calculate your DTI by dividing your monthly recurring debts and payments by your gross monthly income. By doing this, they get a decimal answer. Once converted to a percent (by multiplying by 100), subprime lenders can see how much of your income is already being used by your recurring debts.
For example: If your gross monthly income is $2,500 and the total of your existing bills is $1,200 each month, 1200/2500=0.48, which means your DTI is 48%.
To calculate this yourself, you need to know how much you make before taxes each month, and the total of all your loan payments, mortgages (rent), insurance payments, and credit card bills each month (you don't need to include living expenses like food, or utilities in your math). Don't forget to include an estimated car loan payment in your calculations.
If you're not sure how much of a car loan you might qualify for, you can use online tools to help you do the math.
Why does DTI matter so much to a subprime lender?
Believe it or not, it matters because they want you to succeed with your auto loan. Lenders aren't in the business of making bad deals that a borrower can't repay. If that were the case, lenders would stand to lose more than they make.
To ensure that you have the ability to repay a car loan, subprime lenders typically require that not more than 45% to 50% of your income is being used by your debts. If you already have a lot of payment obligations, you're more likely to risk running into trouble with a car payment if something unexpected happens. Lenders are trying to help you avoid an auto loan default from the very start.
Decreasing Your DTI
Since DTI is such an important factor in a bad credit car loan decision, it's possible for a borrower to meet all the other requirements laid out by a lender and still get turned down for not having enough available income.
In order to qualify for a car loan, subprime lenders typically require you to provide proof that you make around $1,500 to $2,500 a month before taxes, from a single source. Once you meet that initial income qualification, you can let the lender know if you have any additional forms of income.
By increasing the amount of income you're bringing in, you can prove to a lender that you have enough wiggle room in your budget for auto financing. The additional income that can count towards your DTI can come from a second job, alimony, child support, rental income, or even Social Security or permanent disability – as long as you can prove that the income will continue throughout the entire loan term. This often means bringing in award letters, court documents, receipts, bank statements, or tax forms to the dealership.
If you don't have the extra income sources to pad your DTI ratio, you can always take a look at your monthly spending and try to cut down where you can.
Building a Car Buying Budget
It's important that you stay in control of your own auto loan deal. A good way to do this is to prepare a car buying budget ahead of time. Remember that sticker price is just one aspect of the loan process. You can expect more fees to increase your total.
Some of these additional fees are negotiable, such as dealer add-ons and doc fees. Others like tax, title, and license fees are non-negotiable. You can also expect to need a down payment as a bad credit borrower. Usually, subprime lenders require you to bring in around $1,000 or at least 10% of the vehicle's selling price, sometimes whichever is less.
Finding a Loan That Works for You
Now that you know you need to have a little space in your budget for auto loan approval, you need to find a lender that knows how to work with credit-challenged consumers. Subprime lenders are found through special finance dealerships, but they can be hard to pick out of a crowd.
Instead of searching all over town for a dealer that has the right lending resources, start here at Auto Credit Express. We've been connecting borrowers with less than perfect credit to dealerships in their local areas for over 20 years now, and we want to help you, too. There's never any obligation, and the process is fast and free. Get started right now by filling out our car loan request form and we'll get right to work for you.