Minimum Income For Car Loan

Why Income Matters When Applying for a Car Loan

The minimum income you make matters for a car loan because your lender needs to ensure you have enough income to pay your loan, as well as things like your auto insurance costs. As a consumer with good credit, a score of 670 or higher, it's relatively easy to come by a car loan. When you have a lower credit score, though, it can be more difficult, requiring you to prove you meet the lender's requirements, like a specific income level.

Minimum Income Needed for a Car Loan

Typically, the minimum income needed to finance a vehicle starts around $1,500 to $1,800 as a general rule. The top end of the spectrum typically reaches between $2,000 and $2,500. So, as a bare minimum, it's a good idea to make at least $1,500 a month from a regular W2 job. Lenders like to see that you can verify your income, so be prepared with your proof of income and employment.

Minimum income tends to come into play more when you're a bad credit borrower. Bad credit auto lenders use your income as a major factor when you apply for a car loan. As a way of verifying you make enough to afford a car payment, subprime lenders require a certain minimum income. In our experience, the minimum income requirement typically ranges from $1,500 to $2,500 a month before taxes. Granted, this varies from lender to lender, and there may even be programs with lower income requirements.

There are a few other things to keep in mind when it comes to your income:

• Lenders look at your gross income, or what you make before taxes and deductions get taken out.
  
• Lenders want to see W-2 income, so being self-employed or making unearned income introduces a different set of rules to qualify.
  
• You have to meet the minimum income amount with earnings from a single job – you can't combine earnings from a second or third job or additional sources of income.
  
• Bad credit lenders require proof of income, typically with a computer-generated pay stub that lists your year-to-date earnings from the past 30 days, or multiple years of tax returns if you're not a W-2 employee.
  

Because of our experience with subprime auto loans, we know that income is one of the biggest determining factors for subprime lenders during the loan decision.

Factors Influencing Income Requirements

Debt-to-Income (DTI) Ratio Explained

One of the biggest influences on your income requirements is your DTI or debt-to-income ratio. The debt-to-income ratio calculates how much of your income is dedicated to your monthly bills. Subprime lenders typically require that your DTI ratio isn't higher than 50% of your gross monthly income (though this will vary by lender). Because lenders are going to do it the second they get your application, it makes sense for you to calculate your DTI ratio as you prepare for your auto loan.

To find it, add up all of your monthly bills, including your rent or mortgage payments, other loan payments, minimum credit card payments, and any other recurring payments that show up on your credit reports. Next, divide that total by your gross monthly income to get your DTI ratio.

For example, if you made $3,000 a month gross and your monthly bills added up to $1,100, you would divide 1,100 by 3,000 and get 0.366, or roughly 37%. This would fall into the acceptable DTI range for almost all subprime lenders. However, keep in mind that they also factor in an insurance payment of at least $100, and still want your DTI to be below 50%.

Credit Score and Its Relationship with Income

Your credit score plays a role in your minimum income requirements only in that borrowers with better credit may not be asked for as much income verification, since lenders typically look more favorably on consumers with higher credit scores. If you're working with a lower score, around 670 or below, you're likely to need to visit a subprime lender. These lenders look beyond your score to help you qualify for the right loan.

Employment Type and Stability

Different income types require different proof to show that you make the amount you say you're making. There are many types of income that a person can have, such as earned income from wages, tips, or commission, and unearned income, such as passive income from a rental property. There is also self-employment income when you're a contract worker or own a business.

For verification purposes, lenders tend to prefer an employee with a standard W2 income, as it is the easiest form of income to verify.

How Lenders Verify Income for Auto Loans?

Lenders verify income amounts by asking for computer-generated check stubs showing year-to-date income. They typically prefer W2 income since this is the easiest form of income to verify. As a contractor or other independent worker earning 1099 income, you will need to verify your income amount by providing two to three years' worth of tax returns and possibly bank statements to corroborate. Other forms of income, such as unearned income, often need award letters or other documentation as proof of income.

Remember, lenders look at your pre-tax dollar amount, not your take-home pay, so be sure you're using your gross monthly income to verify with, and not your net.

What Documents Count as Income Proof?

Accepted Income Verification comes in many forms, depending on the type of income you're reporting. Typically, this is what is required of a W2 employee is different than what is required of a self-employed person.

For employees, income verification forms include:

• Recent Pay Stubs: Typically, at least 30 days' worth of check stubs showing year-to-date income is required.
• W-2 Forms: If you haven't been in a position long, additional or previous W2 forms may be required.
• Bank Statements: These may be required to verify regular direct deposits to back up your income claims.

Proving Self-Employment or Freelance Income usually requires:

• Tax Returns: Most freelance or self-employed persons are required to fill out a 1099 tax form, and you typically need to provide two to three years' worth.
  
• Bank Statements: These will be used to show that you're making what you claim.

If you don't have traditional income, it will typically depend on your situation as to how a lender verifies that you're paying for the loan. If you're income comes from an unearned source, there are plenty of documents you can use, such as:

• Social Security or Pension Award Letters
  
• Disability or Unemployment Benefits Documentation
  
• Rental Income Statements
  
• Alimony or Child Support Documentation

Remember, it's up to the lender what documents they ask for, so it's in your best interest to come prepared when you're applying for an auto loan, especially if you're working with a subprime lender.

FAQs

What income qualifies for a $20,000 car loan?

There is no set minimum that will be required by all lenders; the rule of thumb of making at least $1,500 to $2,500 a month applies in this situation. However, if you really want to figure out the breakdown of how much you'd need to take on a $20,000 car loan, you need to know a few things.

First is that lenders prefer for your car loan payment to take up no more than 15% of your gross monthly income. This is called the payment-to-income ratio.

You need to know your interest rate, loan term, and approximate loan payment to calculate how much of your income that payment will take up. Then, you can work backwards to determine how much you need to make if said car payment is only 15% of your income.

For example:

If you're taking out a $20,000 loan at 13% interest (assuming a bad credit loan is required) for a 60-month term. You can use an auto loan calculator to determine that this makes your monthly payment roughly $456. Now, you can divide 456 by 0.15 (15%) to see that you need to make approximately $3,040 a month to afford this loan.

Can I get a car loan with part-time income?

You can get a loan with part-time income, as long as you make enough to meet the lender's minimum income requirements. Typically, they prefer income from a single, full-time source, but if you have only one or even multiple part-time jobs, you still must meet the minimum income requirement from a single source.

Does passive income count toward qualification?

Passive income can certainly count towards your loan qualification. When a lender looks at your income verification, they will look for your income first from a traditional source, and then look at non-traditional income such as passive income.

If you meet the requirements of loan qualification from a job, you can still report your passive income to help with your DTI and PTI calculations, which show a lender how much you can truly afford to borrow.