There's more to being able to afford a bad credit car loan than how much you make. Lenders go through a process of determining whether you have enough available income to take on an auto loan based on more than your income. You can see how much car you can afford by doing the same calculations they do.
Qualifying Income for a Car Loan
It's important to lenders that you make enough to get approved for an auto loan. When it comes to qualifying through a subprime lender for poor credit borrowers, they typically require an income of at least $1,500 to $2,000 a month before taxes – but that's just to get you in the door.
Qualifying income is about so much more than what you make. Believe it or not, lenders don't want a car loan to be the only thing you can pay each month, so they go through a process of comparing your income to both your monthly bills plus an estimated auto loan and car insurance payment. This is called "debting you out."
The two calculations they do are called the debt to income (DTI) ratio and payment to income (PTI) ratio. These let lenders see just how much of your income is going toward an estimated auto loan. Because they want your monthly car payment to be reasonable, they cap the allowable percentage for each one.
Your Debt to Income Ratio
Your DTI ratio compares your existing monthly bills, plus an estimated auto loan and insurance payment, to your pre-tax monthly income. Subprime lenders genearlly require that your DTI ratio not exceed 45% to 50% of your income.
To find your DTI ratio, add up all your monthly bills, including a car loan and auto insurance payment, and divide the total by your pre-tax monthly income. This gives you a decimal number, which represents the percent of your income used by your bills.
For example: If you make $2,500 a month before taxes, and your bills plus a car and insurance payment total $1,200, your DTI ratio would be 48%. Like other qualifying factors for bad credit auto loans, the acceptable percentage varies by lender, so whether a 48% DTI ratio allows you to qualify is up to the lender.
Finding Your Ideal Payment Range
When it comes to how much car you can afford in terms of a monthly payment, lenders usually require a PTI ratio of your combined auto loan and insurance payment to be less than 15% to 20% of your pre-tax income. Lenders typically estimate $100 a month for car insurance, but keep in mind that your actual auto insurance payment could be higher or lower than this, depending on your situation.
To find out how much your monthly payment can be at the most, multiply your gross monthly income by 0.15 for the lower end of the scale, and then again by 0.20 for the upper end. Don't forget to subtract $100 from your total for your estimated auto insurance payment.
For example: Using the same income from our earlier example, $2,500, you could potentially get approved for a loan with a monthly payment between $275 and $400. Keep in mind that these numbers are upper limits, and the lower your monthly payment, the better.
Drivers Lane Tip: Even though a lower monthly payment is in your best interest as a credit-challenged consumer, you need to remember to balance your monthly payment with your loan term. If you are stuck on a particular vehicle and the only way to make the payment low enough to fit into your budget is to stretch the loan term out to seven or eight years (84 or 96 months), then you may want to think twice. An auto loan that long is liable to cost you more than necessary due to the higher interest charges over longer loan terms.
Ready to Find a Car in Your Budget?
If you've calculated your budget and are ready to find a car that fits your situation, don't let your credit stand in the way. Drivers Lane is here to help you get matched with the dealership that has lenders to meet your auto loan needs.
We work with a nationwide network of special finance dealers, and we want to help you find one in your area. To get the process started right now, fill out our fast and free car loan request form.