Many times when we start looking for a new car we get blinded by that “new car fever” and think we can afford more than we really can. Before you set out on your jouney of car shopping it is impartant to sit down and do a real honest and accurate assessment of your budget. Write down every possible expense you can think of right down to the last cigarette or double mocha latte you get every morning on the way to work. Remember things like increased car insurance for full coverage and possible increase in gas expense. Once you do all this compare it to your take home pay and determine a monthly payment amount that you truly can afford and stick to it. Ironically the payment amount you determine you can afford is going to be very similar to what the lender is going to approve, although they may use different methods to determine the amount. Sub prime lenders look at a lot of different factors when determining how much payment someone can afford. Below is an explanation of a few.
Debt To Income Ratio-With this method the lender in a sense figures out your budget based on the debt load showing on your credit report. They will take your total monthly obligations and divide it by your gross monthly income to get a debt ratio percentage as it relates to your income. Every lender uses different percentages that they will accept. Here is a rough example of how this works. If your monthly expenses are $1000.00 and your gross monthly income is $3000.00 then your debt ratio would be 33%. Most sub prime lenders will want that ratio to be around 50% including the new car payment.
Last Car Payment Amount-Statistically how you paid your last or current auto loan is going to be very indicative of how you will pay a new one. Sub prime lenders look very closely at your previous auto credit history. If you have been struggling with late or missed payments it is unlikely they are going to approve you for a higher payment than what you have had in the past, regardless of your debt ratio percentages. Conversely if you have been paying your car payments on time every single month they are much more likely to approve you for a higher payment even if your debt ratios are a little tight. You have demonstrated that your car payment is a very high priority in the past and that regardless of what happens you always find a way to pay it. Most sub prime lenders can look past late payments on other debt if your car loans have always been on time.
Payment To Income Ratio-Some sub prime lenders use a “payment to income”ratio to determine how much payment they will qualify you for.The percentage they will accept varies by lender. This is calculated by taking your gross monthly income and multiplying it by the percentage that their guidelines allow for. Here is a rough example of how it works. If your gross monthly income is $4000.00 and the lender allows for a 10% payment to income ratio then the maximum payment they can approve you for is $400.00 per month.
It is important to note that these examples are assuming you are applying for auto loans with bad credit, and have a low credit score.If you have a very high credit score and you apply through a regular prime lender you may not be subject to these type of debt ratio restrictions.
Would have been more exciting to hear a teaser clip of the engine than this picture.