Your income is one of the biggest factors that determine whether or not you qualify for a bad credit auto loan. This starts with meeting the lender's minimum income requirement. Subprime lenders generally require that you make a minimum income of around $1,500 to $2,000 a month before taxes, but those aren't the only income requirements you have to meet.
Bad Credit Auto Loan Income Requirements Explained
Although $1,500 to $2,000 a month before taxes is generally what’s required, the specific amount can vary by lender. Plus, how you make your income plays into meeting the requirement.
When dealing with bad credit, you typically work with either a subprime lender – one that works through special finance dealerships – or a buy here pay here (BHPH) dealer – dealerships that also operate as lenders and offer loans for the vehicles on their lots in-house. Both types of lenders need you to meet their income requirements to qualify, but their rules vary.
Subprime lenders require that you make enough taxable income each month from a single source. This means you can’t combine incomes from multiple jobs or sources in order to meet the minimum requirement. Although you must have one job that meets the minimum to qualify, your secondary source(s) of income can be used later when the lender debts you out, so don’t think your other income doesn’t count.
For BHPH dealers, their income requirements aren’t as strict. Yes, you need to meet a minimum income requirement, but you can combine incomes from multiple jobs or sources. This leniency makes it a lot easier to qualify for a car loan if you’re struggling with credit and have a unique income situation.
DTI vs. PTI Ratios
In addition to meeting the minimum income requirement, your income is also used when the lender calculates your debt to income (DTI) ratio. This ensures that you have enough available income to handle a vehicle payment plus the insurance. As we mentioned, if you have additional source(s) of income, this gets included in your DTI ratio calculation.
Your DTI ratio is calculated like this: add up all your monthly bills plus an estimated car and insurance payment, and divide it by your pre-tax monthly income. For example, if your monthly bills plus an estimated vehicle and insurance payment total $800 and you make $2,000 a month before taxes, your DTI ratio would be 40% (800 divided by 2,000 equals 0.40, or 40%).
Subprime lenders generally require your DTI ratio to be no more than 45% to 50%. If you’re over 50%, you may want to reconsider your car choice or try to lower or eliminate your debts before applying. BHPH dealerships also compute your DTI ratio, but establish a maximum amount on a case-by-case basis.
Bad credit lenders also calculate your payment to income (PTI) ratio to make sure that a vehicle payment and insurance don’t take up too much of your income. They generally cap your PTI ratio around 15% to 20% of your income, and use $100 as the estimated car insurance payment when calculating it. BHPH dealers once again typically consider maximum PTI ratio on an individual basis.
To calculate your PTI ratio, take your pre-tax monthly income and multiply it by 15% (0.15), and then by 20% (0.20). For example, if your income was $2,000 a month, your combined vehicle and insurance payment should be no more than $300 (15%) to $400 (20%).
Ideally, you should aim for a PTI ratio that’s lower than the maximum amount. There’s a lot of other costs to consider when buying a car, such as fuel, routine maintenance, and repairs. If you don't take these items into consideration, your budget might get stretched too thin.
Ready to Get Started?
Now that you know what the income requirements for a bad credit auto loan are, are you ready to get financed? If so, don’t go from dealership to dealership looking for a lender, we can do the searching for you, even if you have low income.
Auto Credit Express connects people to local special finance dealers that specialize in unique credit situations. Take the first step today by filling out our free and secure car loan request form.