Income Requirements for Car Loan: Minimum Income & DTI Ratio

October 18, 2023

Lenders that work with bad credit borrowers want to make sure that you don’t go broke paying for a car loan. To do this, they look at your monthly income and monthly bills when considering you for financing. We explore the typical income requirements for a car loan, including the minimum income qualification and the debt to income and payment to income ratio requirements. You should know how these work so you can see for yourself if you have enough available income for an auto loan.

Why Income Is Key

It’s clear that you can’t get a car loan if you don’t have enough income to repay it. What may not be so obvious is that by judging your ability to pay back a loan, lenders are actually keeping bad credit borrowers safe from even worse credit situations.

As a borrower with a history of late or missing payments, subprime lenders look a bit further into your situation to see why these things are showing up in your credit history. Maybe you had unexpected medical bills or a loss of long-time employment. Those issues are considered situational bad credit and may be looked upon less harshly by these lenders.

On the other hand, if your payment history has been spotty for a long time, and it’s clear you often attempt to get credit or take on loans and default on them, you’re likely to have a tougher time getting approved. This is the result of habitual bad credit.

Subprime lenders that work with bad credit borrowers take these issues into consideration because they want you to be successful with your auto loan. A successful car loan is a great way to build credit.

Your Budget Is Important For A Car Loan

When you finance a car, there’s more involved than the numbers on the window sticker. Lenders know that the negotiated price of your vehicle is only the beginning, so they want to make sure you have enough available income to afford an auto loan and successfully pay it off.

Many lenders can be hesitant to approve bad credit borrowers, but dealership special finance departments know that people are more than just a credit score. However, to be considered for a bad credit auto loan, you need to provide a number of items to the subprime lender.

Using your income, work, and residence history, and a down payment, subprime lenders look at much more than your credit score for approval. Bad credit lenders determine how much car you can afford based on the information you give them, and then you work with the dealer to find a vehicle in their inventory that fits your needs and budget.

Your success with a car loan is just as important to lenders as it is to you. Why? If you default on your loan, you lose your vehicle and whatever money you’ve already put into it. But your lender is losing out, too.

Cars that are repossessed, which typically happens when you default, are usually sold at auction far below their current wholesale value. This means the lender loses money on the sale of the vehicle. Plus, it costs them to hire a recovery company to come and get your car, store it, and send it to auction.

Repossession has been happening rapidly since inventory has been tight on used cars, so it’s important to communicate with your lender before you default on your car loan. It’s really in your lender’s best interest to determine a payment that works for you, to help avoid a default that hurts everyone involved.

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Income Requirements for a Subprime Car Loan

Bad credit lenders look at your monthly income before taxes, or gross pay, in order to consider you for an auto loan. Gross pay is different from your net income, which is your take-home pay after taxes.

When filling out a credit application for special financing, be sure to double-check the amount you’re listing. Entering your net pay instead of gross pay could mean the difference between a rejection and an approval.

The gross income requirement for a bad credit car loan is typically a minimum of $1,500 to $2,500 a month. This income needs to be taxable – meaning tips or side hustles that aren’t being reported won’t count. If you’re a server, driver, or any other professional that relies on tips, be sure you’re reporting them.

Minimum income is also important. Your DTI ratio is just one factor they consider, though. Income requirements vary from lender to lender, but subprime lenders typically have general guidelines they follow for a minimum income. This minimum gives them a baseline for your ability to take on an auto loan.

Usually, the minimum income to qualify for a loan is anywhere from $1,500 to $2,500 a month before taxes, from a single job, although the higher the better.

You must bring your most recent computer-generated check stub showing year-to-date income with you when you visit the dealership to serve as proof of income. If you’re not a W-2 employee and are self-employed or an independent contractor, you typically need to bring in two or three years of tax returns in order to prove your income.

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.

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.

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How Do Lenders Evaluate Your Income?

When you’re taking out a bad credit auto loan, there are certain minimum income requirements you have to meet. Just meeting the income requirements may not be enough as a bad credit borrower though – you need to have enough income available, as well.

Lenders determine how much of your income is available by calculating your debt-to-income (DTI) ratio. This ratio refers to how much debt you have compared to how much income you’re bringing in. They also look at your payment-to-income (PTI) ratios.

The DTI and PTI ratios are two things that let a lender find a car that fits your budget. Your DTI ratio compares your total pre-tax income to your existing bills, while your PTI ratio lets lenders see how much of your available income would be used for your auto loan and car insurance payments combined.

Lenders have DTI caps, meaning they won’t approve you if you need too much of your income to pay bills. When subprime lenders calculate your DTI to consider you for approval, they include a car and insurance payment in the calculation. Subprime lenders typically cap your DTI ratio at 45% to 50% of your monthly income, while they generally require PTI ratios to be no more than 15% to 20% of your earnings.

If you have two or more jobs, subprime lenders usually only accept your primary income for the minimum income requirement, but your other income could be used to lower your DTI. Additional income could include social security, disability, child support, and alimony – and it must last for the entire loan term in order to be considered.

Additionally, subprime lenders usually require bad credit borrowers to be on their job for at least one year, with a three-year consistent work history. Consistent means no gaps longer than 30 days between jobs.

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.

Calculating Your DTI Ratio

Now that you know what lenders are looking at for income, you need to know how to calculate these ratios yourself so that you’re prepared going into the car-buying process.

All you have to do to find out your DTI 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. If you get a percentage less than 45% as your answer, you should be in good shape for an auto loan.

For example, if your existing rent or mortgage, credit cards, bills, loans, car payments, and insurance cost you $850 a month, and your pre-tax monthly income is $2,800 a month, you have a DTI ratio of 30% (850 divided by 2,800 equals 0.30, or 30%), which fits a lender’s typical DTI ratio requirement.

To calculate your PTI ratio, add up your estimated auto loan and insurance payments and divide that by your gross monthly income. Keep in mind that lenders estimate your car payment, which you can do with an estimated payment calculator. They also generally use an estimate of $100 as a monthly insurance cost, just to be on the safe side.

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For example, let’s say your combined auto loan and insurance payment is $400. Divide this by your income of $2,800, and you can see that your monthly car and insurance payment accounts for 14% of your monthly income (400 divided by 2,800 equals 0.14, or 14%).

TCC Tip: When you’re considering your next auto loan, remember that you have to account for things like gas and maintenance costs, so you should allow room in your budget for both. The further away from the lender’s maximum DTI and PTI ratio caps you are, the more room you’re leaving in your budget for these other costs of car ownership.

No Proof of Income?

If you can’t prove your income, or don’t meet the minimum qualifications of a subprime lender, you’re not out of luck. In these cases, you may be able to get a car loan through a buy here pay here dealer.

These are a type of in-house financing dealership, where the dealers are also lenders. This allows them to be a bit more lenient when it comes to financing. They’re more concerned with whether or not you can make the required payments than where your income comes from. They’re still going to be looking into your income, but depending on the vehicle you choose, you may not need as high a minimum income.

Be cautious, however, as buy here pay here dealerships only sell used cars, and they come with higher interest rates than you’re likely to see at a special finance dealer. Also, with either a subprime lender or an in-house dealership, you’re typically required to make a down payment as a bad credit borrower.

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 a Dealer With Special Financing

What we’ve discussed concerning income requirements is common among subprime lenders, but every lender is different, so ask questions about their specific income and DTI rules. Be prepared to prove any income with check stubs, and some lenders may ask for a few – so keep them handy while you’re preparing for an auto loan.

Finding a dealership that can work with bad credit borrowers can seem daunting, but we can help. At The Car Connection, we can connect you to a dealer near you with special financing.

If you’re ready to start car shopping and find a dealership in your local area that may be able to help with your unique credit situation, simply complete our custom, free, and easy auto loan request form.