A bad credit auto loan is a great way for a person with subprime credit to get the vehicle they need while getting a chance to rebuild their credit score. Subprime lenders are willing to approve people with less than perfect credit for a car loan. But there are still certain requirements for bad credit auto loans that an applicant must meet.
The Typical Requirements for Bad Credit Auto Loans
People with poor credit are often unable to obtain a "standard" loan for the car they need. Traditional lending sources (like banks and credit unions) often deny these consumers because they have strict credit score requirements.
Subprime lenders, however, are willing to look beyond your credit score when making a loan decision. They still have minimum qualifications that must be met. There is no nationwide standard, but these are the typical requirements for bad credit auto loans:
- A monthly income of at least $1,500 to $2,000 gross (pre-tax)
- 18 years of age or older
- Current resident and legal citizen/resident of the U.S. or Canada
- Full-time employment or have guaranteed fixed income
- Able to show proof of residency, such as a recent utility bill
- A working phone number for a landline or contract cell phone – a pre-paid cell phone doesn't count
These are the basics, but it's also important to note that subprime lending happens on a case-by-case basis. Each applicant is considered individually and many additional factors related to a consumer's credit and finances will be evaluated. Let's discuss some of the lesser known requirements for bad credit auto loans.
The Lesser Known Requirements for Bad Credit Car Loans
When a consumer applies for an auto loan, they'll notice that many applications ask for detailed information concerning their current income situation and financial obligations. This is because lenders are trying to get a full picture of their finances. The details about income and monthly recurring debt allow them to calculate some of the lesser known requirements for bad credit auto loans, such as:
- A debt to income ratio that doesn't exceed 45% to 50% – A person's debt to income (DTI) ratio is found by adding up their monthly expenses and dividing that number by their gross monthly income. The DTI ratio allows lenders to see if too much of an applicant's income is already budgeted to other expenses. So, a subprime lender will add up an applicant's expenses and INCLUDE an estimated car and insurance payment. The general rule is that this DTI ratio cannot exceed 45% to 50%.
- A payment to income ratio that doesn't exceed 15% to 20% of an applicant's income – Another ratio that lenders will calculate is an applicant's payment to income (PTI) ratio. This is found by dividing an estimated monthly car and insurance payment by an applicant's monthly income. The point of this ratio is that lenders do not want a potential car and insurance payment to eat up too much of the borrower's monthly income. It helps them set an approval amount and ensures that the consumer doesn't buy something that they cannot afford.
- A loan to value ratio that doesn't exceed the lender's maximum allowed – Subprime lending programs are structured so that risk is minimized for all parties involved. The loan to value (LTV) ratio plays a big part in how they evaluate risk. An LTV ratio is the loan amount relative to the value of the vehicle the buyer wants to finance. If the amount of the loan is higher than the vehicle's value, a lender has to assume more risk and will be less likely to approve the loan. Lenders will have a maximum LTV ratio that cannot be exceeded, but it will vary. There are ways that a consumer can lower their LTV ratio and increase their approval chances.
And if you are having trouble finding an auto loan approval, we know just the place that can help.
Bad Credit Auto Financing
Auto Credit Express helps people dealing with credit issues find auto financing. We use your information and our nationwide dealer network to find a dealership near you to match you with. It doesn't cost you a thing to complete our secure and obligation-free online car loan request form, so you have nothing to lose. Get started today!