When you have bad credit, you’re usually going to need to work with a special finance lender to get a car loan. These lenders specialize in helping credit-challenged car buyers get auto financing. But, they don’t accept anyone or everyone. You must meet specific requirements, including a minimum income, to qualify for special financing.
Income Requirements for a Bad Credit Car Loan
The minimum income requirement varies by lender, but you can typically expect a subprime lender to require a monthly pre-tax amount of $1,500 to $2,000 from a single source. If you have multiple jobs, you can’t combine the two to meet the income requirement – one job must meet the minimum on its own. Once you qualify for a bad credit auto loan, you may be able to combine the income from a second job to calculate your debt to income and payment to income ratios.
You must also prove your income to the lender. A recent computer-generated pay stub showing year-to-date earnings works. If you’re self-employed or an independent contractor, a copy of one or more recent tax returns is usually acceptable. You can bring in copies of recent bank statements if you’d like, but, in most cases, this can't be proof of income in the eyes of lenders.
The 20/4/10 Rule
Have you heard of the 20/4/10 rule? This isn’t a universal budgeting rule for car buyers, but it’s a good starting point if you’re not sure how much you should be spending on a vehicle. The 20/4/10 rule states:
- You should make a down payment of at least 20 percent of the car’s value.
- You should finance a vehicle for no more than four years.
- You shouldn’t let the overall monthly cost of owning the car (including the monthly payment, insurance, fuel, and maintenance) exceed 10 percent of your monthly gross (pre-tax) income.
Let’s say you have a monthly income of $3,000, and spend $100 a month on car insurance. Here’s what your auto loan could look like using the 20/4/10 rule:
- Monthly payment: $200 ($300 recommended maximum using the 10 percent rule, minus $100 for auto insurance)
- Loan term: 48 months
- Loan amount: $8,771
- Down payment: $1,760 (slightly over 20 percent of the loan amount)
- Taxes and fees: $634
- Interest rate: 4.5 percent
- Estimated vehicle purchase price: $9,897
The 20/4/10 rule works great for car buyers who have good to great credit with a decent income. If you don’t fit into those categories, the 20/4/10 rule may be hard to achieve, but you can aim to get as close as possible if that’s your goal. As long as you save for a down payment, pick a car loan that fits your budget, and make your payments on time, you have a great chance of successfully completing an auto loan.
Ready to Find Financing?
It’s not easy finding a lender who can work with someone dealing with credit issues. Luckily, we work with experts who can lead you in the right direction. At The Car Connection, we match consumers with damaged credit to a dealership in their area that specializes in helping buyers with less than perfect credit. The best part is that the service we provide is free, fast, and puts you under no obligation. Get the process started by completing our simple and secure online car loan request form today.