By understanding the way lenders compute your DTI and PTI, you can determine if you meet the basic requirements for bad credit auto loans before you apply.
After receiving your credit application from the dealer, one of the first things a bad credit lender will do is determine your debt to income ratio. You too can do this.
Start by adding up all your monthly bills including:
- Minimum credit card payments
- Mortgage or rent
- Utilities payments
- Any other revolving or installment payments you must make each month (such as student loans or child support).
Next, you will want to divide this amount by your gross monthly income (what you earn before taxes). This will show you your DTI ratio.
After adding in a car payment, plus car insurance to your DTI, Lenders will normally cap your total monthly debt at 50% of your monthly gross income.
At the same time, lenders that offer bad credit car loans often prefer that your combined car and insurance payment do not exceed 15% of that gross monthly income figure. This is known as a payment-to-income (PTI) ratio.
Here's an example: a gross monthly income of $3,000 means that a combined car and insurance payment can't exceed $450. Since most lenders estimate car insurance around $100, this leaves a budget of $350 or less for a car payment. $ 3,000 * .15 = $ 450
Purchasing a vehicle service contract that covers the entire loan term could save you money by protecting against most unforeseen expenses caused by mechanical problems. But if you are thinking of buying a used car without a service contract, then you should set aside funds each month to cover the possibility of repairs.
At Auto Credit Express we help people with bad credit find a dealer that can give them their best chance at an approval for a new or used car loan.