Auto Credit Express helps car buyers get connected to local dealerships that can work with challenging credit situations. Because we typically deal with consumers who have credit challenges, we always receive questions from consumers seeking auto loans who wonder if they make enough income to qualify. Or, we get comments along the lines of this, which we received earlier this month:
"Want to know the monthly income amount needed to get a car loan."
We're going to answer this question from the subprime point of view.
Subprime lenders—those willing to approve applicants with poor credit—emphasize many other factors beyond your credit when making loan decisions. Your income is one of the biggest determining factors in whether or not you qualify, but just what income do you report? And, does all income count toward your qualifying amount? Here's what we know.
Borrowers with bad credit who receive overtime pay should know, even before beginning the application process, how this income is typically treated and how it might affect their chances for a car loan approval.
The reason why an understanding of this issue is so important is that in some cases simply waiting for the right time to apply can often mean the difference between a rejection and an approval for a car loan.
What Income Qualifies for Subprime Loans?
Even after spending the last two decades helping consumers with bad credit, here at Auto Credit Express we still find there's confusion over gross income and net income.
The reason why an understanding of this issue is so important is that putting down the wrong type on a car loan application could result in a rejection of credit, when, in fact, if the correct income had been entered, the applicant's loan might well have been approved. This sort of situation is even more common when considering low-income car loans.
Unless you happen to be an accountant, the terms "gross income" and "net income" can be confusing. So think of it this way: the dictionary defines the word "gross" as both "great" and "big".
So "gross" income is "big" income – the income you have before social security, Medicare, and income tax payments are taken out. This is also the income you have before your employer deducts for employee healthcare and 401k contributions. This is income most of us never get to see in our pockets, so it can be easy to forget about it at times.
With all these deductions taking place, you can see why there can be a big difference between someone's "gross" income and what's left once everything is taken out – which is where this is going.
So what is left is "net" income. This is the same as "take-home" income or "wages after taxes." It's the "net income" that you see on your paycheck. Net income is also the amount you see on your bank statement if you have your wages direct deposited.
What Subprime Lenders Want
Now that you know the difference between gross and net income, here's the income figure subprime lenders want you to put down under "monthly income": they want you to tell them what your gross income is.
So if you're filling out a vehicle loan application, please don't add up your paychecks or enter the amount that gets deposited in your bank account. Instead, take a close look at your paycheck and locate your earnings before those taxes and deductions are taken out.
Alternatively, you could check your yearly W-2 wage statement and locate the amount of Social Security wages (found in box 3) you are paid. In some cases, this amount is higher than the amount that appears in box 1, as Social Security wages are the true gross amount (we're using that word again) you were paid before pre-tax deductions (such as those for 401k and health insurance).
Income Requirements & Overtime Pay
Monthly income rules vary by lender, typically, the minimum gross income requirement for a bad credit car loan is somewhere between $1,500-$2,500 a month. "Gross" means before taxes are taken out. So, when you are looking for your exact income, make sure to identify your gross earnings on your paycheck. In most cases, the higher the income, the better the chances of approval. In addition, a higher income level also means a larger selection of available vehicles as well as a greater choice of lenders.
A second consideration is that once the income requirement is met, lenders will then compare it to the applicant's total monthly debt. This debt-to-income ratio will determine if the applicant has enough available income to qualify for a car loan. Once again, larger incomes can support higher debt.
This means that if applicants can add overtime income to their regular income, they'll have a wider selection of lenders and vehicles to choose from. In most cases, subprime lenders need to see that an applicant's overtime pay both exists and is consistent.
A pay stub showing regular pay and overtime pay shows that the applicant does receive overtime income. But in order to prove that overtime pay is consistent over time, the pay stub will need to show that the applicant has been receiving it on a regular basis for at least six months.
This isn't a problem if the application is submitted between July and December, but it could be if a borrower applies during the first six months of the year. That's because even though that borrower might have a W-2 from the previous year showing overtime income, that doesn't prove that he or she is still working overtime the following year. Some lenders, however, still might consider this situation if the applicant can supply W-2s from multiple years that all show overtime pay.
However, there's more to it than that. Subprime lenders also calculate two important ratios when qualifying an applicant: your debt to income (DTI) ratio and payment to income (PTI) ratio.
Subprime lenders have limits when it comes to these two ratios put in place to benefit you. The reason for this is to help applicants create a realistic budget for their car payments.
The goal with a bad credit auto loan should be to improve your credit while also getting the vehicle you need. If you make all of the payments on time, your credit can improve considerably by the end of the loan term. The minimum income requirement, along with the DTI and PTI ratios, help you better map out your car buying budget so you purchase an affordable vehicle, which makes it easier to successfully pay back the loan.
Debt to Income Requirements
Subprime lenders are concerned with how much you make, but they are just as concerned about how much you are spending. This is where the debt-to-income ratio comes in, which deals with your income relative to your monthly bills. To find your DTI ratio, all you need to do is add up all of your regular monthly bills and divide that amount by your gross monthly income.
For example, if you make $2,400 a month and your regular monthly bills add up to $800, your DTI ratio would be 33.33% (800 divided by 2,400 equals 0.3333, or 33.33%). Because it is so easy to calculate, we recommend that you compute yours before applying.
Typically, most lenders will cap their acceptable DTI limit at 45-50%. Please note that they will factor in an estimated car and insurance payment into your monthly bills before computing your ratio. So, make sure to include those when calculating your own.
Payment to Income Requirements
In addition to the DTI ratio, lenders also use payment to income ratio calculations. They do not want your combined car and insurance payment to account for too much of your monthly income, so a lender will set an acceptable PTI limit.
Your PTI ratio is also easy to calculate on your own. Just take an estimated combined car and insurance payment and divide it by your gross monthly income. For example, if you make $2,400 a month and your combined car and insurance payment was $400, your PTI ratio would be 16.67% (400 divided by 2,400 equals 0.1666, or 16.67%).
While it will vary, subprime lenders typically cap your PTI ratio around 15-20%. They also generally use $100 as the estimated car insurance payment.
Even though a PTI ratio establishes the maximum monthly payment a lender will allow you to take on, it's in your best interest to aim well below that amount. You never want to stretch your budget too thin, especially considering the fact that car ownership comes with additional costs like fuel and maintenance that need to be factored into your budget.
The Bottom Line
In the comment from the consumer, they wanted to know the minimum monthly income needed to get approved for a subprime car loan. While the simple answer is typically around $1,500-$2,500, the ratios tell a more complete story. You will also need to consider your extra pay, bills, and potential car and insurance payments in addition to your income level.
If, however, your credit is the reason you are struggling to get approved for a car loan, Auto Credit Express wants to help. We can get you connected to a local special finance dealer that can help you work through your credit quirks. Take the first step today by filling out our free and secure car loan request form.