At Auto Credit Express, we help credit-challenged consumers locate the car dealer that stands to give them their best shot at an auto loan approval. Our dealership network specializes in helping people with damaged credit purchase vehicles because they look to other factors beyond credit scores, such as income. But did you know that qualifying income is about more than what you make?
Qualifying Income: It's Not What You Make, It's What You Spend
Because of our experience with subprime auto loans, we know that income is one of the biggest determining factors for subprime lenders during the loan decision. Most require that an applicant has a minimum monthly income of $1,500-1,800 gross (pre-tax) in order to qualify.
But we also want to express that lending is done on a case-by-case basis. Each applicant is evaluated individually. Nowhere is this more evident than when dealing with income situations.
There are a lot of extenuating circumstances and factors that can sway a loan decision. It's actually possible for an applicant making $1,800 a month to be viewed more favorably than another one that has a monthly income of $3,000.
How is that possible, you ask? When it comes to subprime lending, qualifying income is about much more than the amount of money you take home. It has a lot to do with what you are spending, or your monthly recurring debt.
The Ratios Tell the Complete Story
Subprime lenders do have minimum income requirements, but they will also calculate two important ratios that are going to tell them more about your income situation.
- Your payment to income (PTI) ratio
- Your debt to income (DTI) ratio
Lenders do not want your potential car payment and insurance payment to eat up too much of your gross monthly income, which is where your payment to income ratio comes into play. They will add up an estimated car and insurance payment and divide that number by your monthly pre-tax income. Subprime lenders do not want an applicant's PTI ratio to exceed 15-20% of their take home pay.
They will also be sure to calculate your debt to income ratio. To calculate your DTI, they add up your monthly expenses and divide that number by your gross monthly income. Subprime lenders will even add an estimated car and insurance payment to your monthly expenses and see how that changes your DTI ratio. The general rule is that auto lenders do not want your DTI ratio to top 50% of your pre-tax income.
For example, let's say that George makes $2,500 a month. He is probably feeling pretty good about his chances of getting approved for a subprime auto loan after seeing that he easily meets the minimum monthly income requirement.
But upon closer inspection, a subprime lender finds that George is spending $1,800 on his recurring monthly expenses. That puts his DTI ratio at 72% (1,800 divided by 2,500). Despite the fact that George meets the basic qualifying requirement, the lender may have to deny him based on the fact that so much of his income is already allocated to other obligations.
The Good News
The good news is that you can easily calculate both of these ratios. When preparing to apply for a subprime auto loan, it's a smart idea to do this to get a better idea of where you stand.
To estimate your PTI ratio:
- Start by using our Monthly Payment Calculator, then
- Add an estimated $100 or so for insurance to that car payment estimate, and
- Divide that sum by your gross monthly income
To get your DTI ratio:
- Add up all of your monthly recurring debt, such as your rent/mortgage, minimum credit card payments, wage garnishments, average utility bill payments, other installment payments, and whatever else, then
- Add that number to the combined car and insurance payment estimate you used in your PTI calculations, and
- Divide that sum by your gross monthly income
Calculating these ratios will let you know just how ready you are to add an auto loan to your financial obligations. If your ratios are a little too high, then you are going to want to consider the least expensive car options available, or find ways to reduce your monthly recurring debt.
Also remember that car ownership comes with additional expenses to consider outside of the monthly car and insurance payment. Make sure that your budget includes room for fuel, maintenance, and any unexpected repairs (if you don't have a warranty or service contract).
Financing First
If you have calculated your PTI and DTI ratios and determined that you are ready for an auto loan, don't let your bad credit hold you back. Just come to the experts at Auto Credit Express and let us speed up the process for you. Start by filling out our secure and obligation-free application, and you'll be on your way to getting the vehicle that you need.
