Dealing with bad credit can be tricky, especially when you want to buy something big like a car. We’ve talked before about how much people can borrow based on their income. Now, we’ll look at how much those with low credit scores can get. It’s important to know how your income affects your expectations when considering bad credit car loans.
Income and Bad Credit Car Loans
Firstly, why is income so vital for those seeking a bad credit car loan? Primarily, lenders want assurance. They need to be confident that a borrower can afford the loan payments, even more so when the borrower has a history of credit challenges. In essence, a stable income can serve as a testament to the borrower’s ability to manage and repay the loan.
Payment to Income Ratio (PTI)
Lenders often use the Payment to Income Ratio (PTI) as a guideline to determine how much of an individual’s monthly income should be allocated towards a car payment. This ratio is set at 15%, suggesting that no more than 15% of a person’s monthly income should go towards repaying their car loan. This threshold ensures that borrowers aren’t stretching their finances too thin and can comfortably afford the monthly payments.
Loan Amount, Term, and Rates
When considering bad credit car loans, there are two primary credit score classifications:
Poor Credit (500-600): Qualifies for an interest rate of 18.49%.
Bad Credit (350-500): Comes with a steeper rate of 21.38%.
These rates are combined with a 72-month loan term to calculate maximum loan amounts. It’s essential to remember that these figures are approximate and might vary based on specific lender policies and other factors.
What the Numbers Say
To manually calculate your maximum loan amount based on your specific income and credit score please refer to our blog post titled calculating a maximum car loan based on income and credit score.
| Annual Income | Monthly Income | Max Loan (Poor Credit) | Max Loan (Bad Credit) |
| $21,320 | $1,777 | $11,544 | $10,764 |
| $25,000 | $2,083 | $13,537 | $12,621 |
| $30,000 | $2,500 | $16,244 | $15,146 |
| $35,000 | $2,917 | $18,951 | $17,670 |
| $40,000 | $3,333 | $21,658 | $20,194 |
| $45,000 | $3,750 | $24,366 | $22,719 |
| $50,000 | $4,167 | $27,073 | $25,243 |
| $55,000 | $4,583 | $29,780 | $27,767 |
| $60,000 | $5,000 | $32,488 | $30,291 |
| $65,000 | $5,417 | $35,195 | $32,816 |
| $70,000 | $5,833 | $37,902 | $35,340 |
| $75,000 | $6,250 | $40,610 | $37,864 |
| $80,000 | $6,667 | $43,317 | $40,389 |
| $85,000 | $7,083 | $46,024 | $42,913 |
| $90,000 | $7,500 | $48,732 | $45,437 |
| $95,000 | $7,917 | $51,439 | $47,962 |
| $100,000 | $8,333 | $54,146 | $50,486 |
With a starting annual income pegged at $21,320 (based on a $10.25 per hour minimum wage and a 40-hour work week), the maximum loan one can obtain is between $10,764 and $11,544, depending on the exact credit score. As incomes rise, so does the potential loan amount.
However, a critical observation is that most new cars have a starting price of over $20,000. This means that for individuals with bad credit aiming for a new car, an annual income exceeding $40,000 becomes almost imperative.
Down Payments and the Loan to Value (LTV) Ratio
It’s also crucial to factor in the often overlooked aspect of down payments. The down payment needed varies by credit score. For those with bad credit, lenders typically have a Loan to Value (LTV) limit of 100% of the invoice amount for a new car or the trade-in value for a used one. This means the down payment typically needs to cover sales tax, title and license fees, dealer fees, and any difference between the selling price and the car’s invoice or trade-in value. In real terms, the higher the down payment, the better the chances of loan approval, especially for those with limited credit.
Wrapping It Up
The intertwined relationship between income and bad credit car loans cannot be understated. For those navigating the challenge of securing a car loan with less-than-perfect credit, understanding these financial intricacies is crucial. By factoring in PTI, understanding interest rates, and recognizing the importance of a substantial down payment, individuals can better position themselves to secure a car loan that aligns with their financial reality. Remember, knowledge is power, and being informed can make the path to car ownership smoother and more attainable.
AutoByPayment.com offers accurate estimates of new and used car loan payments based on self-selected credit score, current rebates, down payment, and trade equity or negative equity, without customers having to provide their personal identifying information such as email and phone.