Budgeting for a Bad Credit Auto Loan

One of the best pieces of advice we can give when you’re preparing to apply for an auto loan is to create a budget. There are many factors you should consider when putting together your budget, especially since you can be sure lenders take a close look at all your expenses.

Calculating How Much Car You Can Afford

Budgeting for a Bad Credit Auto LoanWhen you create your budget, be aware that your auto loan payment and car insurance cost are only one part of it. Lenders calculate your available income based on all your monthly bills when they’re determining if you can afford a vehicle.

Two calculations in particular are used to ensure you can afford an auto loan: the debt to income (DTI) ratio and payment to income (PTI) ratio. If you have bad credit, lenders are typically looking for a DTI below 50 percent and a PTI of no more than 20 percent. These calculations are easy to do yourself – either manually or using online tools.

For DTI, lenders add your estimated monthly car loan and insurance payments (lenders usually assume $100 for car insurance, even though actual amounts vary) to the sum of your existing monthly bills and divide the total by your gross (pre-tax) monthly income. The resulting percentage is how much of your income goes to your bills each month. If more than half of your income is already dedicated to bills, you may not be eligible for auto financing at the moment.

Let’s look at this calculation:

For example:

  • Monthly Bills + Auto Loan + Car Insurance: $354 + $374 + $100 = $828
  • Total ÷ Monthly Income: $828 ÷ $2,400 = 0.345
  • DTI Ratio: 34.5 percent

Your PTI is how much of your monthly income will be used by just your car and insurance payments. For this percentage, lenders divide your combined car and insurance payment by your gross monthly income. This usually needs to fall between 15 to 20 percent of your income for approval. You can multiply your gross income by 0.15 and 0.20 to find your payment range.

Here’s what the math looks like:

For example:

  • $2,400 x 0.15 = $360
  • $2,400 x 0.20 = $480

This means you can spend between $360 and $480 on your combined car and insurance payment each month and meet the lender’s qualifications.

Extra Out of Pocket Costs

Along with your DTI and PTI holding up to a lender’s scrutiny, you have to have enough income to qualify for a bad credit auto loan. Typically, lenders require you to make between $1,500 and $2,000 a month of W-2, pre-tax wages from a single source – though specific amounts and source requirements vary.

Additionally, you should always take into account the other costs of owning a car. Things like fuel and repairs can add up and should be accounted for in your personal budget. Research vehicles before visiting the dealer. This is helpful because ending up in a vehicle with poor fuel economy, or that’s prone to break down may be more than your budget can handle. Also, tax, title, and license fees, along with dealer documentation fees typically aren’t financed, so you should be prepared to pay for them out of pocket.

Lastly, when you’re getting a bad credit car loan, a down payment will be required in most cases. Though it varies, lenders usually ask for $1,000 or 10 percent of the vehicle’s selling price, whichever is less. We usually recommend that borrowers put down as much as they can afford – ideally 20 percent of the vehicle’s selling price. The larger the down payment, the less you have to borrow. This saves you money by lowering your monthly payment and cutting down the interest charges you pay over the term of your loan. It also reduces the time your vehicle spends with negative equity.

Bottom Line Budgeting

Here at The Car Connection, we want to see you successfully qualify for and complete your auto loan, no matter your credit situation. If you do have concerns about where to turn to get a bad credit auto loan, let us help.

By filling out our simple, no-obligation auto loan request form, we can get to work matching you with a local special finance dealer. We work with a coast-to-coast network of these dealers, and they have the lending specialists available to help people in many types of credit situations. Don’t wait any longer, start the process of getting your next auto loan right now!


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