When you have bad credit and need an auto loan, your income plays a large role in whether or not you qualify. There are a lot of different rules concerning income with subprime auto loans, which is a big reason consumers have so many questions on the topic, like this one we received last month:
"What is the monthly minimum income to qualify for an auto loan?"
Income to Qualify for a Subprime Auto Loan
Subprime lenders typically have a minimum monthly income requirement of $1,500 to $2,000 before taxes are taken out. This will vary from lender to lender, and will even be different across the loan programs a lender offers. In most cases, with all else being equal, the more you make, the better your chances of getting approved.
You'll need to show proof of income with the appropriate documents. To verify that your income is what you say it is, subprime lenders want to see your most recent computer-generated pay stub that lists your year-to-date earnings.
Keep in mind that subprime lenders are looking for your pre-tax, or gross, income. This is what you make before social security, Medicare, income tax, and employer deductions like healthcare and 401(k) contributions are taken out.
Debt to Income and Payment to Income Ratios
In addition to a minimum requirement, subprime lenders use two ratios to get a better idea of your ability to pay back a car loan:
- Debt to Income Ratio – Lenders look closely at your monthly income compared to your bills. They'll take your bills and divide it by your monthly income to find your debt to income (DTI) ratio. This shows how much of your income is already dedicated to other expenses. Subprime lenders typically set the maximum DTI ratio they'll accept at 45 to 50 percent.
- Payment to Income Ratio – At the same time, these lenders don't want your car payment to take up too large of a chunk of your monthly income. They set a maximum payment to income (PTI) ratio, usually between 15 and 20 percent, to make sure this is the case. Your PTI can be found by taking the combined total of your estimated monthly car and insurance payments and dividing it by your monthly income.
Again, subprime lenders will use your gross monthly income when making these calculations.
Helping You Find Financing
Not every lender is willing to approve applicants with bad credit. If you're dealing with less than perfect credit and need a car loan, you have to find a dealership that's signed up with lenders who are.
At Auto Credit Express, we've assembled a nationwide network of dealerships that are signed up with lenders willing to help people with bad credit. We can connect you with one of these dealers in your area if you fill out our fast and free auto loan request form. Get started today.