Vehicle ownership involves so much more than the sticker price of a car – from the cost of gas, to making sure you pay tax, title, and license fees, right down to saving up for a down payment. When you buy a vehicle, you need to make sure you budget for the total cost of car ownership, not just a monthly loan payment.
Preparing Your Budget for a Car
When you shop for a vehicle, especially with bad credit, you need to make sure that you have a budget. Sticking to a budget is a great way to make sure you're getting a car you can comfortably afford.
It's important to take into account everything involving the cost of vehicle ownership, including the price of the car, tax, title, and license fees, insurance, fuel, maintenance, and repairs.
As a general rule, you don't want your auto loan payment to exceed 15% of your pre-tax monthly income. This is called the payment to income (PTI) ratio. To calculate your PTI ratio, take your gross (pre-tax) monthly income, and multiply it by 0.15 to find the maximum amount. You want to try for a monthly payment that’s less than this amount.
To get an overall sense of how a car loan affects your available income, add up all your bills, including an estimated vehicle payment and auto insurance, and divide that total by your monthly income before taxes are taken out. This is called a debt to income (DTI) ratio. Subprime lenders typically cap your DTI at 50%. If you're already using 50% or more of your income without a car loan, there’s a good chance you won’t get approved for one.
For example: If you make $2,500 a month before taxes and the total of your bills, including an estimated vehicle and insurance payment, is around $1,050, then your DTI ratio equals 42% of your income.
To see how much of an auto loan you may qualify for, or what your monthly payments are likely to look like without doing the calculations yourself, you can use the Car Loan Estimator located on our homepage.
Planning for Upfront Costs
Part of the cost of buying a vehicle are the tax, title, and license fees. These fees vary by state, and are over and above the cost of the car itself. Though these fees can often be rolled into the loan, it's better if you pay them upfront. If you roll them into your loan, you're going to end up paying more in interest charges over the loan term.
Another upfront cost that you typically can't avoid as a bad credit car buyer is a down payment. The exact amount you need varies by lender, but, as a general rule, subprime lenders that work with credit-challenged borrowers ask for a down payment of $1,000 or 10% of the vehicle's selling price, whichever is less.
It's okay to put down the minimum amount – for instance, putting down $500 on a $5,000 loan – but if you can make a larger down payment, you should. The more you put down upfront, the more you save in interest charges down the road.
Saving for Future Needs
When you're thinking about your overall car buying budget, keep in mind ongoing costs you're going to need to include, such as fuel and maintenance expenses. You should be looking for an affordable, reliable vehicle, and taking fuel economy and safety ratings into consideration, as well as consumer reviews.
Knowing whether your car is going to be a gas guzzler or sips its fuel can help you determine how much room to leave in your budget for this expense. You should also factor in items like regularly scheduled oil changes, and the cost of replacing parts that wear out, like wiper blades and tires. It's better to be prepared at the start of your car buying journey, rather than get stuck with unexpected expenses down the road.
Find the Right Car Loan for You
Now that you know the importance of preparing a budget and planning for the overall cost of vehicle ownership, are you ready to find the car you need? If you're struggling with credit issues, then you've come to the right place!
At Drivers Lane, we specialize in helping credit-challenged consumers get connected to dealerships that offer the right kind of lenders. Bad credit, no credit, and even bankruptcy are no problem if you're working with the right lender.
Instead of driving all over town looking for a loan, let Drivers Lane do the searching for you. Simply fill out our easy, no-obligation auto loan request form today, and we'll get to work finding you a local dealer.