Bad Credit Car Buying Guide Step 3 of 4 - The difference between the car you want to buy, CAN buy and probably should buy...
In steps 1 & 2 we covered what credit tier you'll fall into, what type of down payment you may or may not need and when cosigners are helpful. Here we're going to cover some extremely important topics that will make or break your approval.
Here is what's covered below:
What Kinds of Vehicles Do Lenders Finance
There is pretty much a lender out there for all types of credit and practically all types of vehicles. One key to keep in mind here is that the older the vehicle and/or the higher the miles the more risk there is for the lender and therefore the higher the interest rate and the shorter the loan term.
Referring back to step 1 of the bad credit car buying guide I typically find that the types of vehicles that are easiest to get customers approved for are as follows:
Customers in the Sub-Prime tier are usually easier to get approved for vehicles that are 6-8 years old with 80,000 - 100,000 miles. This is mainly because I use Credit Acceptance Corp for these customers and those types of vehicles seem to work best with their program.
This tier can go both ways and really depends on the lender that is approving your loan. Sometimes the slightly older vehicle with a bit higher miles works the best and sometimes it's the newer lower mile vehicle that works best.
In this tier I've usually found the best approvals to be on vehicles that are four years old or newer and have less than 60,000 miles. Actually, under 50,000 miles usually works better, because 72 month loans are possible, which helps to lower customers payments.
What the Banker Wants to See to Say Yes
Lenders that specialize in bad credit auto loans aren't quite as concerned with your past credit history or your credit score. Both of these are still important, but not quite as important as your Debt to Income and Payment to Income ratios.
Knowing what these are will help you determine upfront how much down payment you will need in order to buy that BMW 325i you've had your eye on...
This is fairly easy to figure. Simply review your credit report, which you got in step 1, and you'll see a figure for your scheduled monthly payments.
Take that figure, let's say $400 a month, add your rent or mortgage (if not already included) of $600, and divide that by your gross (before taxes) monthly income, let's say $3,000 a month.
This would mean you have $1,000 a month going out and $3,000 a month coming in, or a 30% Debt to Income (DTI) ratio.
Most Non-Prime and Sub-Prime lenders will want your DTI to be below 45-50% of your gross monthly income. In the example above, you'd still be "inline" with a $350 - $500 a month payment. Of course, your payments could be less, but not more.
Most lenders will want your Payment to Income (PTI) ratio to be 15-20% or less. Using the $3,000 income from above, that would mean the maximum payment they would allow you to have would be $450 - $600 a month. Of course, it can be less, but not more.
You must pass in both DTI and PTI or else no loan. If you already have your eye on a vehicle use this Car Payment Calculator to see where you stand. You'll probably want to figure an 18-24% rate to get accurate payments.
If you find that your payments put you over the maximum for either DTI or PTI, then you'll need to come up with more down payment to get your payments inline with what they will approve.
It's in Your Best Interest To...
This is really not the time you want to rush out and buy your dream car. Not unless your dream car is $10,000 or less. I say this, because you don't want to be financing your $30,000 dream car at 18-24%. That's a lot of wasted money!
Use this purchase to rebuild your credit and get your credit score up (there is no better credit builder than a well paid auto loan). Crawl before you walk and walk before you run and get your dream car on the next go around when you qualify for low teen rates or better.
We're not done yet! Be sure you know what car buying scams to look for or you could find yourself humiliated, stuck for cash, or worse...Walking!!! Follow these car buying tips to help avoid a ripoff.