You can determine if you meet an important requirement for a bad credit auto loan by understanding the way lenders calculate your payment to income ratio.
Your Payment to Income Ratio
Auto lenders set minimum income levels to help you create a realistic budget for your car payment. When it comes to bad credit car loans, the typical standard for a minimum monthly income is $1,500-$1,800 gross. "Gross" means before taxes are taken out.
However, subprime lenders will also calculate two critical ratios: your debt to income (DTI) ratio and your payment to income (PTI) ratio. These help them establish a big picture view of your income situation. And in order to qualify for a poor credit car loan, you have to meet their standards for these two ratios.
Your DTI ratio has to do with your income relative to your monthly bills. It helps lenders see how your bills compare to your income, giving them an idea of how much is available for a car loan. We discuss DTI ratios at length here, and you can even learn how to calculate your own.
But today we are going to focus on your payment to income ratio. To find this ratio, you take an estimated car and insurance payment and divide it by your pre-tax monthly income.
Lenders don't want your potential car and insurance payment to take up too much of your monthly income. So, they will cap your PTI ratio at a certain percentage. Most subprime lenders do not want an applicant's monthly car and insurance payment to be more than 15-20% of their take home pay.
Calculating Your PTI Ratio
It's easy to calculate your PTI ratio. In fact, it's smart to do this while you prepare to apply for your auto loan. It gives you a better idea of where you stand and your acceptable price range.
Here's an example. Let's imagine that Dwight earns $2,000 a month gross. This means his combined car and insurance payment cannot top $300 for lenders with a 15% PTI ratio cap, or $400 for those with a 20% limit.
How do we know this? You can figure out yours in seconds using a calculator. Just punch in your pre-tax monthly income and multiply it by 0.15. The number you get is the maximum amount your car AND insurance payment can be for lenders with a 15% PTI ratio limit. Do it again but multiply by 0.20 this time to see what it would be with a 20% cap.
Just for reference, when lenders calculate these ratios, they will typically estimate $100 a month for car insurance.
The Bottom Line
Calculating your payment to income ratio gives you a rough idea of your car buying price range. And the key word here is "rough." Remember, you never want to stretch your budget too thin. Also, keep in mind that car ownership comes with additional costs to keep in mind. These include fuel, routine maintenance, and repairs.
If you are ready to apply for your car loan, but are worried your credit may keep you from being approved, Auto Credit Express can help. We match applicants with imperfect credit to local dealerships that specialize in bad credit loans.
See what we can do for you today by completing our free and easy online auto loan request.