When applying for a car loan, one of the first things a lender will ask you about is your income – for good reason. The lender wants to make sure that you have the income available to pay for the vehicle! There are a few calculations that lenders use to determine how much income you have available and how much of a monthly car payment you can comfortably afford.
Income Verification Questions For Auto Loans
Verifying your source of income is very important when applying for an auto loan. Most subprime lenders prefer borrowers to have W-2 income, as proven by computer-generated check stubs that show cumulative income for the year.
Many bad credit auto lenders require you to earn around $ 1,500 to $ 2,500 per month, gross (before taxes are levied). This minimum monthly income must also come from a single source.
Your time at work is also important. Many auto lenders prefer that you have been in the same position for at least six months to a year. Some may even look at your employment history for the past three years, requiring that you have not had a job interruption for more than 30 days during that time.
Stability is key when it comes to getting approved for new credit, especially a bad credit car loan. The longer you live in the same residence, hold the same job, and have a stable income, the better your chances of getting approved for the auto loan.
However, a work history and stable income does not always mean that you have enough income to be eligible for funding. When considering a car loan, lenders use two calculations to determine how much vehicle you can afford: your payment-to-income and debt-to-income ratios.
Before giving you an approval stamp, your income is compared to your bills and the car’s estimated payment.
Your payment / income ratio
Calculating your Payments-to-Income Ratio (PTI) is a great way to determine how much of a monthly payment you can comfortably afford based on your own income. If you’ve ever wondered, “How much vehicle payment can I afford with my income?” The PTI ratio can do just that.
When you apply for a car loan, the lender looks at your income and the car’s estimated payment for the vehicle you’re considering – or it determines the maximum payment you’re eligible for. Typically, auto lenders will maximize your PTI ratio by around 15% to 20%, which means that no more than 15% to 20% of your gross monthly income should be used for your combined monthly car and car payments. assurance.
To get your PTI ratio, you take an estimated monthly vehicle and insurance amount and divide it by your gross monthly income. To estimate an insurance payment, many lenders use an average of $ 100 per month.
For example:
- $ 200 (estimated car payment) + $ 100 (estimated insurance payment) = $ 350
- Monthly income: $ 2,000
- 350/2000 = 0.175, or 17.5%
- PTI ratio: 17.5%
In this example, the borrower may be eligible for a car loan. If the borrower in this example was aiming for a lower monthly payment around $ 200 with their income level, they would definitely qualify in terms of PTI ratio.
If you are thinking of a specific vehicle or price, you can use this formula as a guide to estimate a car payment to match your income.
Your debt-to-income ratio
Your Debt-to-Income Ratio (DTI) takes into account your monthly bills, including an estimated vehicle and insurance payment, to see how much leeway you have in your monthly budget. Even if you do the required monthly minimum and can comfortably afford the car, that doesn’t mean you have that income!
To find your DTI ratio, add up your:
- Minimum payments by credit card
- Mortgage / rent payment
- Any other monthly loan or credit
- Estimated monthly auto and auto insurance payments
Once you’ve added everything up, divide it by your gross monthly income.
If the percentage you get is less than around 45% to 50% (the typical lender threshold), you are likely to qualify in terms of the DTI ratio. If you are done, you may need to look for a cheaper car or cut down on some expenses.
Although you are required to meet the minimum monthly income requirement with only one source of income, you can usually add additional sources of income to lower your DTI ratio. If you have additional sources of income, sometimes they can be added to your qualifying monthly income and used to calculate a better ratio, which can improve your chances of getting approved.
Why Auto Lenders Care About Income
Your income and your ability to pay for a vehicle are very important to a lender. If your income is too low or too much of it is absorbed by other expenses, it can lead to car loan denial. Lenders don’t want to approve borrowers for a car they’ll have a hard time paying for!
Another common reason that an auto loan is turned down is a bad credit rating. Even if you have enough income to pay for a vehicle, a sufficiently low credit rating may be the only reason for refusal. There are auto lenders who can work with difficult credit situations called subprime lenders.
Subprime lenders are registered with special finance dealers who help borrowers with bad credit, no credit, and even bankruptcy. Finding resellers with these resources can be a hassle if you don’t know where to look, but you don’t have to worry if you start with us at Auto Express Credit. We have created a nationwide network of dealers who are registered with subprime lenders. Fill out our free auto loan application form and we’ll put you in touch with the one in your area.
