As a credit-challenged car buyer, it can be tough to know just what a lender is looking for when you apply for an auto loan. Lenders that can help in this situation usually have many requirements to be met, and one of the most important is your debt to income (DTI) ratio.
What Is a Debt to Income Ratio?
Your DTI ratio compares your bills to your monthly income. Lenders use this to determine if you have enough available income to consistently and comfortably make your car loan payment.
For credit-challenged consumers, lenders generally require that your DTI ratio be no more than 45% to 50%, including the estimated vehicle and insurance payment. Lenders that work with bad credit borrowers don't want you to go broke paying for a car. This is one of the reasons they calculate your DTI ratio every time you apply for an auto loan.
Your DTI ratio is just one factor they consider, though. Before you can get to this step, lenders first require a minimum income. The qualifying amount varies from lender to lender, but you're typically required to make at least $1,500 to $2,000 a month before taxes from a single source.
Calculating Your DTI Ratio
Since lenders debt you out every time you apply for a loan, it's important that you know how to do this calculation yourself. This way, you know what to expect going into a car loan, or when you should wait before applying.
A DTI ratio is a simple formula. All you have to do to find out yours is add together all your monthly bills, including an estimated auto loan and insurance payment, and divide that number by your gross (pre-tax) monthly income. When you convert the answer to a percentage, you have your debt to income ratio.
For example, if your gross monthly income is $2,425, and your existing monthly bills, plus a car loan and insurance payment, total $815, then your DTI ratio is approximately 34% (815 divided by 2425 equals 0.336, or 33.6%). This ratio would allow you to be considered for an auto loan, as long as you meet all the other requirements.
However, if you have higher monthly bills, you may not be so lucky. The same income with $1,315 in bills each month equals a DTI ratio of 54%. This is over the threshold most lenders accept, and may lead to you being turned down.
Other Factors for Qualification
Once you've determined that you have a qualifying debt to income ratio, you can breathe a sigh of relief on the income aspect of getting an auto loan. Even though income is a big part of qualifying, it's just one of the items lenders look at with credit-challenged consumers.
In addition to having a qualifying income, you also need to meet the employment requirement, make a down payment, provide a list of personal references, and provide proof of residence, identification, and a working landline or contract cell phone in your name.
When a borrower is struggling with credit, these factors help a lender get the whole picture and determine their ability, stability, and willingness to successfully complete a car loan.
If you're on the fence in terms of DTI, minimum income amount, or credit score, a lender may require you to make a higher down payment or ask that you add a cosigner or co-borrower to your loan.
Finding Your Next Auto Loan
Knowing whether or not you have the available income to qualify for an auto loan is an important step, but so is knowing where to go to find the kind of lenders that work with credit-challenged consumers.
Not all lenders deal with bad credit, and those that do aren't always easy to spot if you don't know where to look. Luckily, you have The Car Connection on your side.
We're teamed up with a nationwide network of special finance dealerships that have subprime lenders. These lenders specialize in helping borrowers with less than perfect credit. We'll connect you with a dealer in your area if you get started by filling out our easy car loan request form online.