Budgeting for a Car Loan With Bad Credit

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - June 24, 2020

Budgeting for a car loan is about more than just saving for a down payment and knowing how much you want to spend each month. If you have poor credit, you need to be sure that your budget meets lender standards. They're looking to see if you have enough income and that your current expenses don't take up too much of it already.

Finding Your Debt to Income Ratio

Even if you're not in the process of buying a vehicle, it's a good idea to know how much of your income is already needed for your expenses. This can help you stick to a budget, both in daily life and when buying a car.

How do you know if you're living within your means? The answer is using a simple formula called the debt to income ratio, or DTI ratio for short.

To know where your budget stands, just add up all your monthly bills – including car and auto insurance payments – and then divide that total by your gross monthly income. The result is a decimal that can be converted into a percentage. The lower it is, the more available income you have.

When you're working with a subprime lender (sometimes called a bad credit lender) for a car loan, they usually require your DTI ratio to be 45% to 50% or less. This means that all your current monthly expenses, including estimated auto loan and insurance payments, can't exceed 45% or 50% of your pre-tax (gross) monthly income. If they do, you're likely out of luck for a car loan approval.

Payment to Income Ratio Matters, Too

Your DTI ratio is only one of the calculations a subprime lender uses to consider you for auto loan approval. They also look at a calculation called a payment to income ratio, or PTI ratio. This estimates how much of your income is needed for your car and insurance payments.

To find your PTI ratio, add up your estimated auto loan and insurance payments and divide that total by your pre-tax monthly income.

Since auto insurance can vary widely in price, lenders generally use an estimate of $100 a month when they're doing their math. Your car insurance may be more or less than this, but again, this is just an estimate.

When it comes to PTI ratio, lenders typically cap this around 15% and 20% of your gross monthly income, but they’d prefer it to be much lower. In fact, the lower your PTI ratio, the better off you are.

Minimum Income Requirements

When you're budgeting for an auto loan, DTI and PTI ratios are only half the battle. You need to have enough income to start with.

All lenders have their own guidelines and requirements you have to meet in order to qualify for vehicle financing. However, subprime lenders generally require a minimum monthly income of around $1,500 to $2,000 to even consider you for approval.

In order to prove your income, you have to bring your most recent check stub(s) with you to a dealership. Most lenders require you to provide at least 30 to 60 days of payment records via computer-generated check stubs showing year-to-date earnings.

Why Subprime?

Calculating your DTI and PTI ratios are important in budgeting regardless of your credit situation. But if you have bad credit, this can be especially important because it plays a big role in your ability to afford a car loan. Subprime lenders that work with less than perfect credit look at your ability, stability, and willingness to complete an auto loan.

These lenders know your credit score doesn't tell the whole story, so they look at other factors to determine an approval. These include:

  • Your income, debt to income ratio, and payment to income ratio – These show you're able to afford the loan.
  • Your employment history, residence stability, and proof of a working phone – These show you're stable enough to complete a loan.
  • Meeting a down payment requirement – This shows your willingness to invest in your own success.

Because subprime lenders look into all these factors, they're able to better understand your situation and provide you with vehicle financing. This isn't a chance you're likely to get as a poor credit borrower if you apply for a loan through traditional lenders.

Start the Car Buying Process Here

Now that you know what it takes to budget for a car loan with bad credit, it's time to find a lender to work with, and that's where we come in. Here at CarsDirect, we know how much an auto loan can mean when you're struggling with credit issues. We want to help you get the loan you need so you can start building credit toward a better future.

In order to find a subprime lender, you need to know where to go. Subprime lenders only work through special finance dealerships, and we can guide you to one in your area. To get started, fill out our no-obligation car loan request form, and we'll work to match you to a local dealer. Our process is fast, free, and saves you the stress of searching in vain, so get started right now!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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