When it comes to getting a car loan with less than perfect credit, there are many factors you need to be aware of before you jump into financing. One of the most important for lenders is your ability to repay the loan. In fact, whether or not you can afford to finance a vehicle comes down to more than just your income.
What Lenders Are Looking For
In order to be considered for an auto loan with poor credit, subprime lenders (those that work with bad credit borrowers) look at your ability, stability, and willingness to successfully complete a loan – in addition to your credit score. Before considering your stability and willingness, a lender's first concern is that you can afford the payment. This is your ability to repay the loan.
What lenders are looking for is not only how much income you have, but how that income compares to the bills you have, including an estimated car loan and insurance payment. In order to ensure that you're not getting in over your head, lenders go through a process called "debting you out." When lenders do this, they look at a few different things.
First, most subprime lenders have a minimum income requirement of $1,500 to $2,000, which you're required to meet from a single source of income. They then compare that, plus any additional income from an allowable source, to your regular monthly bills to find your debt to income (DTI) ratio. Lenders typically require a DTI of no more than 45% to 50%.
In addition to your DTI, lenders also calculate your payment to income (PTI) ratio, to ensure that your auto loan payment itself doesn't take up too much of your monthly income. Lenders cap your PTI at no more than 15% to 20% of your income, but the lower the better.
Finding Out if You Qualify
If you meet the lender’s minimum income qualification, you should find out if you qualify for car loan consideration by calculating your DTI and PTI ratios. This way, there should be no surprises about what you can afford when you get to the dealership.
To calculate your DTI, add up your existing bills, plus your estimated auto loan and insurance payments, and divide that total by your pre-tax income. For example, if your gross monthly income is $2,700, and your bills add up to $900 including a car loan and insurance payment, then your DTI is approximately 33% (900 divided by 2700 equals 0.33, or 33%). However, if your bills are more, say $1,390, then your DTI would be about 51%, which is too high in most lenders' eyes.
You should also calculate your maximum payment range. This way, you know when a vehicle or payment doesn’t fit your budget. Since lenders generally limit your maximum PTI at 15% to 20%, you can find out your maximum payment range.
All you have to do is multiply your pre-tax monthly income by 0.15 and then again by 0.20 to get the range of the highest payment you're typically allowed. Using the income of $2,700 a month from the example above, your maximum monthly payment could be $405 to $540.
Remember, though, that auto loans are a balancing act between how much you pay each month and how long your loan is. The lower your monthly payment, the better, as long as you're not stretching your payments over too long a loan term.
Finding an Affordable, Reliable Vehicle
Now that you know how to determine whether or not you qualify for a car loan, it's time to find a lender that can help if you're credit-challenged. Not all lenders can work with unique credit situations, and those that can aren't always easy to find. That's where CarsDirect comes in.
We work with a nationwide network of special finance dealers that have the lending resources to help people with poor credit. If you're ready to find your next vehicle, simply fill out our easy, zero-obligation auto loan request form. After you do, we'll get to work matching you with a dealership in your area.
