The lenders that offer car loans to consumers with poor credit pay particular attention to the income and expenses of applicants
In our experience
Car buyers with problem credit need to understand how high-risk auto lenders determine if they have enough of an income in order to meet the basic qualifications for an auto loan.
Here at Auto Credit Express we know how this is done because we've spent over twenty years helping consumers with bad credit that are searching for online auto loans find those new car dealers that can offer them their best chances approved auto loans.
We even went so far as to construct a website – complete with a resource section – to help them understand the subprime car loan process.
Debt and income
Once they receive a credit application from the new car dealer (most higher-risk car lenders won't loan directly to consumers), one of the first things they'll do is compute that person's debt to income ratio (or DTI, for short).
Before it's submitted, applicants can, and should, do it for themselves. The reason for this is simple: if the ratio is too high, applicants will not only be wasting both the dealer's and lender's time, it will result in at least one inquiry on their credit reports that, in turn, will lower their credit scores even further.
Here's how 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.
If it's a joint application and the applicants are co-buyers (that is they are married or if their assets can be co-mingled) the income and expenses of both will be computed together. If the second applicant is a co-signer, that individual's income is considered separately and that person, independently, has to meet the lender's debt-to-income requirements.
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 15% of that same gross monthly income figure. This is called the payment-to-income (or PTI) ratio.
So what does this mean?
It means, for example, that with a gross monthly income of $3,000 the combined car and insurance payments cannot exceed $450. Since most lenders will automatically budget $100 per month for car insurance, this leaves a remaining balance of $350 as their self-imposed ceiling for car payment.
Those prior figures aside, when it comes time for consumers to determine their vehicle budget they need to leave room for addition expenses including gas and normal maintenance costs – as well as setting aside funds for unexpected repairs. This last area, by the way, brings up another important issue.
For buyers considering an "as-is" used car without a service contract covering the entire loan term, the idea of setting aside a certain amount each month to cover the possibility of repairs is a good one.
If that sounds like too much of a hassle then these buyers should do themselves a favor and purchase a used car service contract and either pay for it separately roll its cost into the monthly car payment. By purchasing a service contract they'll be guarding against most unforeseen expenses caused by mechanical problems. Like anything else buyers should also shop around for pricing to be sure the price offered by the dealer is fair.
As we see it
By understanding the importance of both DTI and PTI ratios and knowing how to compute them, credit-challenged consumers will know beforehand it they meet at least these two requirements.
If they do our next suggestion is that they give us a shot at their business. That's because Auto Credit Express matches people that have experienced car credit difficulties with those new car dealers that can offer them their best chances for auto loan approvals.
So if you find yourself in this situation and you're ready to reestablish your auto credit, you can begin now by filling out our online auto loan application.