Debt-to-Income Ratio and Auto Loan Eligibility


When you need a bad credit car loan, qualifying isn’t just about how much money you make, but how much you are already spending.

Income vs debt, why it matters

Of course, you will need the money to pay off an auto loan. But lenders aren’t just worried about the money you get – they’re also worried about the money coming out. This is especially true if you are a borrower with bad credit.

When you have a credit score of around 660 or less, you are most likely to qualify for a car loan through a subprime lender. These third party lenders work through special finance dealers and help people with unique credit situations get the loan they need.

To do this, they use additional factors in addition to your credit score to make sure that you are suitable for financing. One of the factors that a subprime lender uses to determine your eligibility is called the debt-to-income ratio (DTI). This tells the lender how much disposable income you have in your budget each month to pay off your auto loan and the full coverage auto insurance required.

Lenders calculate your DTI by dividing your debts and recurring monthly payments by your gross monthly income. By doing this, they get a decimal response. When converted to a percentage (by multiplying by 100), subprime lenders can see how much of your income is already being used by your recurring debt.

For example: If your gross monthly income is $ 2,500 and your total existing bills are $ 1,200 each month, 1200/2500 = 0.48, which means your DTI is 48%.

To calculate this yourself, you need to know how much you earn before taxes each month and the total of all your loan payments, mortgages (rent), insurance payments, and credit card bills each month (you don’t have need to include expenses like food or utilities in your math). Remember to include an estimate of your car loan payment in your calculations.

If you are not sure how much of a car loan you may be eligible for, you can use online tools to help you do the math.

Why is DTI so important to a subprime lender?

Believe it or not, this is important because they want you to be successful with your car loan. Lenders are not on a mission to close bad deals that a borrower cannot repay. If this were the case, lenders would lose more than they gain.

To ensure that you have the capacity to repay a car loan, subprime lenders generally require that no more than 45% to 50% of your income be used by your debt. If you already have a lot of payment obligations, you’re more likely to have trouble paying for a car if something unexpected happens. Lenders try to help you avoid a car loan default early on.

Decrease your DTI

Since DTI is such an important factor in a bad credit car loan decision, it is possible for a borrower to meet all of the other requirements stated by a lender and still be turned down for not having enough income. available.

In order to qualify for a car loan, subprime lenders generally require that you provide proof that you earn approximately $ 1,500 to $ 2,500 per month before taxes, from a single source. Once you have achieved this initial income qualification, you can notify the lender if you have other forms of income.

By increasing the amount of your income, you can prove to a lender that you have sufficient wiggle room in your budget for auto financing. The additional income that may count for your DTI may come from a second job, alimony, child support, rental income or even Social Security or permanent disability – provided you can prove that the income will continue for the life of the loan. This often means bringing award letters, court documents, receipts, bank statements or tax forms to the dealership.

If you don’t have the additional income streams to fill your DTI ratio, you can always take a look at your monthly expenses and try to cut where you can.

Establish a car purchase budget

It is important that you maintain control over your own car loan agreement. A good way to do this is to prepare a car purchase budget in advance. Remember, the sticker price is only one aspect of the lending process. You can expect more fees to increase your total.

Some of these additional fees are negotiable, such as reseller surcharges and documentation fees. Others, such as taxes, titles and license fees, are not negotiable. You can also expect to need a down payment as a borrower with bad credit. Usually, subprime lenders will require you to bring back around $ 1,000 or at least 10% of the vehicle’s selling price, sometimes whichever is less.

Find a loan that’s right for you

Now that you know that you need some space in your budget for auto loan approval, you need to find a lender who knows how to work with consumers with credit problems. Subprime lenders are found with special finance dealers, but they can be difficult to choose from among the crowd.

Instead of looking around town for a dealer who has the right loan resources, start here at Auto Express Credit. For more than 20 years, we’ve been connecting borrowers with less than perfect credit to dealers in their area, and we’re eager to help you too. There is never any obligation, and the process is fast and free. Get started now by filling out our auto loan application form and we’ll work directly for you.


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