Payment To Income Ratio Explained
When you have bad credit, lenders will need to look at factors other than your credit score to determine if you meet the eligibility requirements for a loan. For example, lenders want to know that you can afford the car you want to buy. At CreditYES®, we look at your monthly income to help determine your eligibility. You’ll need to earn at least $1,500 per month before taxes to qualify. But there’s a little more to it than that.
Your lender will also want to know how much of your income is already being used for debts. This is known as your debt-to-income (DTI) ratio. This would include such items as housing payments, student loans, credit card payments, and other loans. Your debt should ideally not use up more than 35% of your income each month. You can learn more about debt-to-income ratios and how to calculate them by reading our blog post about DTIs here.
After that calculation, lenders will want to figure out your payment-to-income (PTI) ratio. If you have an existing car loan, that would be figured into your DTI. If you don’t have one, or you’re considering taking on another, the lender will look at how much your new car payment would be combined with the monthly insurance rate for that vehicle. They will want to make sure that this new amount doesn’t overwhelm your finances. However, many lenders will look at your gross income, that is the amount you take home after taxes, to determine eligibility. Lenders will often consider 15-20% PTI to be the maximum threshold.
You can calculate your PTI very simply. Just take your monthly take home pay amount and multiply it by 0.15 to determine what 15% would be, or by 0.20 to determine what 20% would be. This may not be exactly what a lender is looking for, but it can give you a rough idea of what your combined car loan and insurance payment could be.
Lenders always want to make sure they can get back what you borrow. For that reason, they don’t want you to obligate yourself to more payments than you can handle. Whether you agree with these estimates or not, you’ll likely need to adhere to them in order to secure a bad credit auto loan.