You can't get a car loan if there's a question of your ability to repay it. This is why there are basic income requirements you have to meet in order to get approved for a bad credit auto loan. We're taking a deep dive into one of the most important qualifications for getting a bad credit car loan.
Income Requirements for Subprime Auto Loans
When it comes to getting an auto loan with bad credit, you're most likely to have success by working with a subprime lender. They assist credit-challenged consumers, and have specific requirements that you must meet in order to gain an approval.
Chief among these requirements is a minimum monthly pre-tax income qualification, so that a lender is confident you can repay your loan. Though the specific amount can vary, bad credit borrowers are typically required to make around $1,500 to $2,500 a month before taxes.
Lenders usually prefer borrowers to have earned income. However, some forms of unearned income may count toward the minimum monthly income requirement. There are a few different rules that apply to the different kinds of income.
Different Types of Income
Not everyone works as a W-2 employee, although bad credit lenders tend to prefer this income type. Here's what to expect for the three most common forms of income:
- Earned income – Most subprime lenders prefer borrowers to have earned income from a job. Employment income can be proven with a recent check stub which shows year-to-date income. When you’re a W-2 employee, all your qualifying income must come from one job. If you have more than one job, additional income may help you qualify, but can't help you meet the initial minimum income threshold. This must come from only a single source.
- Unearned income – In some cases, income that comes from Social Security, alimony, rental income, or child support can be used as your primary source of income, but this depends on the lender's rules. In order for these forms of income to count toward your car loan approval, you still need to meet the baseline minimum requirement amount. However, like a second job, these may help you qualify if you receive any of them in addition to employment.
- Self-employment or contract income – When you're self-employed, or are the owner operator of a business that gets a 1099 form, your ability to qualify for a bad credit auto loan based on income takes a bit more documentation than a check stub (since you likely don't pay yourself with one). In cases of these income types, you're typically asked to provide three year’s worth of tax documents, along with your most recent bank statements.
How Additional Income Helps
When you have more than one source of income, it can increase your odds of getting approved because additional money can show you have more income than debt. This is important when you're financing a vehicle, since lenders don't want you to go broke just to afford a car.
In fact, if you're turned down by a subprime lender based on income, it's usually due to them not wanting to leave you in a worse position than you came in with. How do they know this is possible? By doing a few simple calculations.
Lenders calculate two ratios when they're deciding whether or not to give you an auto loan: your debt to income (DTI) ratio and payment to income (PTI) ratio.
If you qualify for financing, lenders estimate how much of your available income is already being used by your bills, and how much of your income is going to be taken up by your combined car loan and auto insurance payments. The amount being used compared to the amount of income you have is your DTI ratio; the amount spent on your loan and insurance payment compared to your monthly income is your PTI ratio.
Calculating Your Budget for a Car Loan
Calculating your DTI and PTI ratios yourself can help you prepare for your bad credit car loan. Both are simple to do with just a calculator.
To find your debt to income ratio, add together your recurring monthly bills, including an estimated car loan and insurance payment, and divide the sum by your pre-tax monthly income. This percentage shows how much of your income is already being used by other bills.
Subprime lenders generally cap your DTI ratio at 45% to 50% of your monthly income. So, if you're already paying a lot for other expenses, you may not be able to take on the additional burden of an auto loan.
The PTI ratio, on the other hand, tells you how much of your monthly income is used by a car loan and insurance payment. Lenders typically cap this at 15% to 20% of your income, but the lower your payment to income ratio, the better.
To find your payment to income ratio, multiply your gross monthly income by 0.15 and then again by 0.20. You should strive to keep your combined monthly payment for your auto loan and insurance below this range.
Need a Hand Getting Your Next Auto Loan?
We know how important getting a good car loan can be to your financial future, especially if you have less than perfect credit. A bad credit auto loan is a great way to start building your credit score so you can get an even better deal next time you need a vehicle.
Now that you know the typical income requirements you have to meet to get a bad credit car loan, it's time to find financing. Auto Credit Express can help by getting you matched to a local dealership that has the lending resources you're looking for.
You can start the process by filling out our fast and free auto loan request form. Let us make finding your next car loan a breeze!