There is a reason why subprime lenders are looking for a minimum income level before they will even review a car loan application.
Recently, we had a consumer ask this question about our bad credit car loan application: "I noticed that it takes 1,500 to apply. My daughter's check is only 973.00. Am I out of luck?"
We are assuming this consumer was referring to the minimum monthly income requirements listed on our site, since we don't charge applicants a fee to apply. With that in mind, the correct answer to this question is, we really need more information before we can tell you for sure.
Income Requirements and Poor Credit
Although it varies by lender, the typical minimum income requirement for a subprime loan is $1,500 per month in gross wages. The key word here is "gross", which means what a person makes before taxes are taken out.
But even if that person was referring to his or her daughter's take-home pay (net wages after taxes), it's still highly unlikely the daughter's gross wages would be $1,500 – which means that person would be "out of luck."
So why is the minimum income typically $1,500?
The reason for this is that subprime lenders qualify applicants to make sure they can afford a car payment by computing that person's debt to income ratio (or DTI, for short).
And this ratio isn't hard to calculate. In fact, applicants should do it themselves because if it's too high, they'll be wasting the time of everyone involved. It will also mean at least one inquiry on their credit reports that, in turn, will lower their credit scores even further.
To do it, start by adding up all regular monthly bills such as mortgage or rent payments, credit cards, loan payments, average utility payments and anything else (student loans, child support, etc.) that must be paid.
Next, divide the total by the gross monthly income (the amount before taxes and other deductions are taken out). This will give you the monthly debt percentage. Most non-prime lenders will cap the total monthly debt of an applicant (including a car payment and auto insurance) at 50% of their monthly gross income.
At the same time, most lenders will not want the car payment (including insurance) to exceed 20% of that same gross monthly income figure. This is called the payment-to-income (or PTI) ratio. At the same time, lenders will factor $100 for car insurance and a minimum of $300 for rent/mortgage into an applicant's budget .
If you follow all this, you can see where it's going with our consumer. A monthly gross income of just $973 will limit the borrower's car payment (minus insurance), under the best of circumstances, to just $94.60 – not nearly enough of a payment to finance a decent used car - especially considering the interest rates charged by subprime lenders.
Finally, since the primary reason for a subprime car loan is to reestablish a borrower's car credit by financing (at the very least) a newer, reliable used car while avoiding a repossession at all costs, you can see why subprime lenders insist on minimum income levels in order to qualify for one of these loans.
The Bottom Line
Subprime lenders set minimum income levels to give borrowers the best chance to reestablish their auto credit by creating a realistic budget for their car payment.
In addition, Auto Credit Express helps applicants with problem credit find those new dealers that are signed up with these lenders.
So if you're ready to begin the process, you can start now by filling out our online auto loan application.