February 15, 2019

Do Low Income Auto Loans Exist?

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Did you know that even low-income borrowers can get an auto loan? You don't have to make more than the average income for your area or even the average to get approved.

What lenders really want to know is that you can comfortably afford the auto loan as well as your other monthly obligations.

Lenders need to minimize their risk of default, or you walking away from the car because you can't afford it. If you can prove that you can afford the loan despite your low-income level, you may be in business.

Bottom Line: It can be very difficult to qualify for a loan when you're rebuilding your credit. If you have bad credit or a filed for bankruptcy, check out Auto Credit Express.

They help car buyers connect to dealerships that offer sub-prime auto financing, even with no money down. ACE is partnered with over 1,200 dealerships so depending on where you live, you may be able to find good options from their network.

What Is the Minimum Income for a Car Loan?

In general, lenders/dealers require at least $1,500 monthly income to qualify you for a car loan. There are a few lenders out there that may allow less, but you'll need compensating factors to make up for it.

Compensating factors can be a great credit score or an exceptionally low debt-to-income ratio.

The minimum income requirement will vary by dealer/lender, though. If you don't meet the requirements of one dealer/lender, you can always try another.

Try to keep your search within a few weeks' span. This way, you don't get hit with more than one inquiry on your credit report.

The credit bureaus understand when you are rate/program shopping, but they only give you limited time to do so without hitting you with more than one inquiry.

What Percentage of Income Should Go to a Car Payment?

Dealers/lenders look at two types of debt ratios when evaluating your auto loan application. First, they look at your payment-to-income ratio, or the comparison of your potential car payment to your gross monthly income (income before taxes). Ideally, it shouldn't exceed 15% of your monthly income.

For Example:
If you have $2,000 in monthly income, your car payment shouldn't exceed $300.

They also look at your total debt ratio. This is the comparison of all of your monthly debts that report on your credit report to your income. Think of debts like your minimum credit card payments, mortgage, or student loan payments. This number shouldn't exceed 40%, but many dealers/lenders prefer it as low as 36%.

You can figure out what you can afford by multiplying your gross monthly income by 36%.

Transportation Expenses = (36% X Monthly Income) - Monthly Debts

Let's say your monthly income is $2,000

  • 36% of $2,000 = $720
  • Your rent is = $300
  • Your Credit Card Payment is = $25
  • $720 - $325 = $395

Some lenders/dealers may include the cost of insurance in their calculations when qualifying you for an auto loan.

Do Car Dealerships Verify Your Income?

Car dealerships/lenders typically verify your income so that they know that you can afford the loan. They need to verify that you bring in the amount that you claimed on your loan application.

Verifying your income for a car loan can be as simple as providing your last pay stub. Some lenders stop there, but others may ask for your W-2s as well as a 3-year employment history. Usually, you only need to be at your current job for six months, but lenders like to see that you have at least a 3-year employment history before giving you a car loan.

Can You Get an Auto Loan with Social Security or Disability Income?
Technically, you can use Social Security income to qualify for a car loan, but it varies by lender.

If you have low credit and/or low income, some lenders may be wary of giving you an auto loan simply because they cannot garnish government income.

Getting a Car Loan with Low Income and Bad Credit

If you have low income, you typically want to offset this risk with great credit. What if you have bad credit, though? While it might be more difficult or more expensive, it can be possible to get an auto loan if you are in this situation.

The best thing you can do to minimize the cost of the loan and to increase your chances of approval is to stabilize your employment and have a large down payment. The more money you can put down on the car, the lower your risk of default becomes.

People with poor credit should also check out Auto Credit Express. You may have better odds of approval because they work with more than 1,200 dealers. Over 1.8 million people have bought a car with their help.

Bad credit lenders require at least $1,000 or 10% of the car's price as a down payment (whichever is less). If you can make a larger down payment, though, you increase your chances of approval.

It's also a good idea to check your credit report for inaccuracies. If there is any inaccurate information reported, you should write to the credit bureaus to have them change it. You'll need to provide ample evidence of the inaccuracy in order for the credit bureau to investigate the claim.

You can also use this opportunity to see what you can improve in your credit history. For example, do you have accounts that are late right now? Bring them current and make a few on-time payments afterward to help your credit score increase.

Pay close attention to your credit utilization rate or the comparison of your outstanding debt to your credit line. Keeping your balances at 30% or less of your credit line will help increase your credit score as well.

Anything you can do to increase your credit score will maximize your chances of finding an auto loan despite your low income.

Can You Get an Auto Loan with No Job?
You don't necessarily need a job to get an auto loan. As long as you can prove that you have stable income that will continue for the foreseeable future, you may secure a loan approval.

This only works if your income is from retirement, investments, child support, or disability. If you are on unemployment, you won't be able to get an auto loan.

Other Ways to Increase Your Loan Chances

In addition to the methods mentioned above, you can increase your chances of auto loan approval with loan income with one or more of the following:

Use a Cosigner: If you have a cosigner with excellent credit and/or high income, it can offset the risk you pose as the primary borrower.

Find a Newer Car: You probably won't be able to purchase a brand new car if you need a subprime auto loan, but finding a car that is "newer" and has low mileage can help your chances of approval.

Job or Residence Stability: Even if you have low income, there's something to be said about having the same job for more than three years. It shows lenders that you are stable and reliable. The same is true for your residence. If you stay in the same home for more than three years, you show stability, which decreases your risk of default in the eyes of the lender.

Bottom Line

Don't give up hope if you need a car loan but know that you have low income. Do your research, take your time, and make sure the loan is right for you.

Just because you have low income doesn't mean you have to pay inflated interest rates. It may mean, however, that you have to find a subprime lender willing to give you a loan with your lower income.

Write to Kim P at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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