In most cases with fixed, unearned income, you’re going to run into difficulties getting approved for a bad credit car loan. There are still solutions you can explore, which include getting a cosigner for some help and talking to the right lenders.
Bad Credit Car Loan Income Requirements
When it comes to bad credit car loans, you’re usually going to need to have a steady and consistent earned income. For most subprime lenders, the minimum monthly income requirement is $1,500 to $2,000 before taxes. This income can only come from one source to meet this stipulation.
Employment history is also important to many bad credit lenders. Most prefer that you’ve been at the same job for at least one year, and have had a consistent work history for at least three years.
If you’re on a fixed income and you meet the minimum requirement, you could very well be eligible for a bad credit auto loan, but it does depend on the type of income you have, how long you’ve had it, and how long it lasts.
Why You Need Earned Income
Typically, you’re going to need W-2 or 1099 income for it to count toward your lender’s requirements. This is because subprime lenders usually need an earned income that’s garnishable.
If you default on the loan, auto lenders still require their borrowers to pay the deficiency balance. This is the leftover loan balance after the vehicle is repossessed and sold at auction. If you default and go through a repo, although you no longer have the car, you’re still responsible for paying any remaining balance on the loan.
Another thing subprime lenders require is that your income last for the duration of the auto loan. This means temporary income, such as unemployment, won’t help with meeting a bad credit lender’s requirement.
If your primary income isn’t from a typical day job, you still may be eligible. However, if unearned income, such as government benefits, is your only source of income, it becomes very difficult to get approved by a subprime lender. This is because tax-free income can’t typically be garnished.
Some incomes that can’t be garnished in most states includes: Social Security, child support, alimony, disability, unemployment, VA benefits, worker’s compensation, retirement funds, and public assistance in some states.
However, unearned, fixed income doesn’t count for nothing.
What Fixed Income Can Help With
While tax-free income can’t always help meet the minimum income requirement, it can usually help lower your debt to income (DTI) and payment to income (PTI) ratios.
Your DTI ratio considers how much money you’re bringing in each month, and compares it to your expenses. The PTI ratio is a calculation that determines how much of your monthly income a car payment accounts for, along with the cost of auto insurance.
Lenders use these ratios to help them make their loan decisions. Subprime lenders generally won’t approve a bad credit borrower with a DTI ratio of more than 45% to 50%, and factors in all sources of income – earned and unearned. The same typically goes for a PTI ratio of more than 15% to 20%.
Getting a Car Loan With Help
If your primary income is unearned and the lender doesn’t accept this type of income to qualify, you can have someone else available to cosign to improve your chances of getting approved for a bad credit car loan.
A cosigner could help you get approved if they have income that can be garnished, and a high enough credit score. A cosigner is someone who “lends” you their good credit score, but your income amount still needs to meet the lender’s requirements. If you’re only struggling to get approved because of your bad credit, a cosigner can increase your chances of approval and possibly help you qualify for better loan terms that you may have gotten on your own.
If you don’t have earned income, and your spouse or life partner does, this can also help you get approved by a subprime auto lender. Your spouse could also sign the loan documents, making you co-borrowers on the car loan. Since incomes of co-borrowers can be combined if they are spouses, a co-borrower can help you meet the earned income requirement.
Finding a Bad Credit Car Loan
While a tax-free income can make it difficult to get approved depending on the lender, a cosigner or co-borrower could increase your chances of approval. Tax-free income can also be used to lower your DTI and PTI ratios. Once you have things settled, the next step is finding a lender that works with unique credit and income situations.
If you’re ready to look for a bad credit lender, look no further than Auto Credit Express. We’ve created a nationwide network of dealerships all over the U.S., and we match bad credit borrowers to dealers with special finance departments that work with subprime lenders.
We’ll look for a dealership near you with bad credit lending options for free, and all it takes is filling out our free auto loan request form.