When you apply for an auto loan, one of the first things a lender is going to ask you about is your income – for good reason. The lender wants to make sure that you have the available income to pay for the vehicle! There are a few calculations lenders use to see how much income you have available, and how big of a monthly car payment you can comfortably afford.
Income Verification Matters for Car Loans
Verifying your income source matters a lot when you apply for an auto loan. Most subprime lenders prefer that borrowers have W-2 income, proven with computer-generated check stubs that show year-to-date income.
Many bad credit car lenders require you to make around $1,500 to $2,500 monthly, gross (before taxes are taken out). This minimum monthly income also needs to come from one source.
Your time on the job is also important. Many auto lenders prefer that you’ve been at the same job for at least six months to a year. Some may even look at your work history for the last three years, requiring that you haven’t had a gap in employment for longer than 30 days in that time.
Stability is key when it comes to getting approved for new credit, especially a bad credit car loan. The longer you’ve lived at the same residence, held the same job, and had stable income, the better your chances at getting approved for the auto loan.
However, a stable work history and income doesn’t always mean that you have enough income to qualify for financing. When you're being considered for a car loan, lenders use two calculations to determine how much vehicle you can afford: your payment to income and debt to income ratios.
Before they give you a stamp of approval, your income is compared to your bills and to the estimated car payment.
Your Payment to Income Ratio
Calculating your payment to income (PTI) ratio is a great way to see how much of a monthly payment you can comfortably afford based on your own income. If you’ve ever wondered, “How much of a vehicle payment can I afford with my income?”, the PTI ratio can do just that.
When you apply for an auto loan, the lender takes a look at your income and the estimated car payment for the vehicle that you’re looking at – or they figure out the maximum payment that you qualify for. Typically, auto lenders max your PTI ratio around 15% to 20%, meaning no more than 15% to 20% of your gross monthly income should be used for your combined monthly car and insurance payments.
To get your PTI ratio, you take an estimated monthly vehicle and insurance payment and divide it by your gross monthly income. To estimate an insurance payment, many lenders use an average of $100 a month.
- $200 (estimated car payment) + $100 (estimated insurance payment) = $350
- Monthly income: $2,000
- 350 / 2,000 = 0.175, or 17.5%
- PTI ratio: 17.5%
In this example, the borrower may be able to qualify for an auto loan. If the borrower in this example were to aim for a lower monthly payment around the $200 range with their income level, they would for sure qualify in terms of the PTI ratio.
If there’s a specific vehicle or price point you have in mind, you can use this formula as a guide to estimate a car payment that works for your income.
Your Debt to Income Ratio
Your debt to income (DTI) ratio considers your monthly bills, including an estimated vehicle and insurance payment, to see how much wiggle room you have in your monthly budget. Even if you make the minimum monthly requirement and can pay for the car comfortably, it doesn’t mean you have that income available!
To find your DTI ratio, add up your:
- Minimum credit card payments
- Mortgage/rent payment
- Any other monthly loan or credit payments
- Estimated monthly vehicle and auto insurance payments
Once you have all of those added up, divide them by your gross monthly income.
If the percentage you get is below around 45% to 50% (the typical lender threshold), you’re likely to qualify in terms of DTI ratio. If you’re over, you may have to look for a less expensive car or cut some expenses out.
While you’re required to meet the monthly minimum income requirement with a single source of income, you can typically add additional sources of income to lower your DTI ratio. If you have additional sources of income, they can sometimes be added to your qualifying monthly income and used to calculate a better ratio, which can improve your odds at an approval.
Why Auto Lenders Care About Income
Your income and ability to pay for a vehicle matters a lot to a lender. If your income is too low, or too much of it is being eaten up by other expenses, it can lead to an auto loan denial. Lenders don’t want to approve borrowers for a car that they’ll have trouble paying for!
Another common reason for being turned down for an auto loan is a poor credit score. Even if you have sufficient income to pay for a vehicle, a low enough credit score can be the sole reason for a denial. There are car lenders out there that can work with difficult credit situations, called subprime lenders.
Subprime lenders are signed up with special finance dealerships that assist borrowers with bad credit, no credit, and even bankruptcy. Finding dealers with these resources can be a hassle if you’re not sure where to look, but you don’t have to worry if you start with us at Auto Credit Express. We’ve produced a nationwide network of dealerships that are signed up with subprime lenders. Fill out our free auto loan request form, and we’ll match you to one in your area.