When you're considering getting a car, it's important to know that there's more to making a budget than the price of the vehicle. The selling price of a car is just the beginning of the true cost of an auto loan, which is why it's important to have a budget in place before you begin shopping for a vehicle.
What Auto Lenders Look for in Your Budget
Budgeting for a car doesn't have to be a lot of work, but it is important. Lenders go through a process with every potential borrower that allows them to see if a person is financially eligible for an auto loan. You can do this process yourself to see what you're working with, and what the lender sees when they look into your income.
This process looks at both your debt to income (DTI) and payment to income (PTI) ratios. Lenders don't want you to go broke paying for a vehicle, so they set limits on how much available income a potential borrower must have, and how much of that available income can be used for a car payment.
These ratios are easy to calculate:
- Debt to income ratio – This shows a lender how much of your income is already being used to pay for existing bills. To calculate this, simply add together your regular bill payments, and divide the total by your gross (pre-tax) monthly income. This allows lenders to see what you have to work with. Since they want to ensure you have enough disposable income, they generally cap your DTI ratio at 45% to 50%, although this can vary by lender. If your calculations show that your current bills use more than this, don't expect to get approved.
- Payment to income ratio – This calculation lets a lender estimate how much of your income would be taken up by an auto loan and insurance payment. Lenders like to see your monthly payment using as little of your income as possible. For this reason, they typically cap your maximum PTI ratio at 15% to 20%, but the lower the percentage, the better. In order to find an ideal monthly payment range, simply multiply your gross monthly income by 0.15 and then by 0.20. Keep in mind that this is your maximum estimated payment range for your car loan, so there’s nothing wrong with aiming lower.
Now that you know what lenders look for in your budget, you can begin searching for an affordable, reliable vehicle within your price range.
Tips on Budgeting for a Car Loan
Don't forget that there's more to an auto loan than meets the eye. Once you get a vehicle picked out at a dealership, you have to consider a few additional items to budget for. These things, such as taxes, fees, and add-ons, all affect the price you end up paying. Make sure to do your research, because items like sales tax and documentation fees vary from state to state.
Additionally, as a bad credit car buyer, you need to allow extra room in your budget for a higher interest rate and a down payment. Down payments are almost always required if you don't have good credit.
This means you generally need to have at least an additional $1,000 or 10% of the vehicle's selling price ready to go when you sign the contract. This is the typical down payment requirement of bad credit lenders.
Lastly, remember that the price of the car is just the beginning, since you need to budget for ongoing expenses like fuel, maintenance, and repairs. Because these things are a necessary part of vehicle ownership, you should take them into consideration before choosing a car. This way, you can ensure you have enough available income to cover them.
Finding Your Next Car Loan
If you've got your budget ready to go but aren't sure what the next step is, rest assured, CarsDirect is here to help. You can research new and used vehicles to find something that fits your budget, and you can even get on the right path toward finding the right dealer for your situation.
We work with a large network of special finance dealerships from coast to coast that have the lending resources you need as a bad credit borrower. Whether you have bad credit, no credit, or even been through a bankruptcy, these lenders want to help get you into a car.
Don't hesitate any longer. Simply fill out our fast and free auto loan request form to get the process started today!
