When applying for a bad credit auto loan, it's important to know the difference between gross income and net income. Reporting one instead of the other can often be the difference between getting approved and getting denied.
Gross Income vs. Net Income
One thing many people do when starting a job is try to calculate how much they'll earn every paycheck or every month. If you did the same only to be disappointed by the amount that wound up on your paycheck or that was direct deposited into your bank account, then the difference between gross income and net income may be lost on you. It can be a confusing topic, so let's lay out what they mean.
"Gross" income refers to what you make before taxes and other deductions are taken out. If you are a salaried employee, your gross monthly income is what you get if you take your annual salary and divide it by 12 (the number of months in a year). If you earn an hourly wage, you can figure out your gross monthly income by multiplying your hourly rate of pay by the number of hours you work per week and then multiplying that figure by 4.33 (the approximate number of weeks in a month).
Gross income can be easy to forget about because we never see it in our pocket. It's hard to remember it even exists considering all of the deductions taken from it. These include federal income taxes, state income taxes, local income taxes, Social Security and Medicare, in addition to healthcare and retirement plan contributions.
"Net" income is what you actually take home after taxes and deductions are factored in. This is the amount that you see on your paycheck or that gets direct deposited into your bank account on pay day.
So, for example, if you earn $3,000 a month gross, but $400 goes to taxes, $200 goes to Social Security and Medicare, and $200 goes to healthcare and retirement contributions, your net income would be $2,200 a month.
As you can tell, there is usually a big difference between your gross income and your net income. This is why understanding what subprime auto lenders are looking for is important.
Subprime Auto Lender Income Requirements
Lenders want you to list your gross income on your auto loan application. So, while your net income—the amount going into your pocket—is what you are more familiar with, it's what you are paid before taxes and deductions that lenders want to see.
Bad credit car loans work a little differently than traditional ones. Subprime lenders are willing to work with challenging credit situations because they look carefully at many other factors in addition to your credit. One thing they will pay particularly close attention to is your income.
These lenders set minimum income requirements because they want to make sure you can afford a vehicle. The minimum gross monthly income amount subprime lenders are typically willing to accept is between $1,500 and $2,000.
Now that you know the difference between gross and net incomes, you can see how putting the wrong type on your application could result in a rejection when you otherwise might have been approved.
The Bottom Line
If you're filling out a car loan application, make sure to not add up your monthly take-home pay and enter that amount. Instead, take a closer look at your paycheck to locate your gross earnings and use that figure.
At the same time, if your credit is making finding auto financing a struggle, it might be time to let Auto Credit Express help. We assist car buyers with credit challenges by connecting them to local special finance dealerships. These dealers are teamed up with subprime lenders and know how to work with unique situations.
What are you waiting for? Begin the process by filling out our secure car loan request form today.