Consumers with bad credit need to take the proper steps before applying in order to ensure that they will budget for a bad credit auto loan.
Been there, done that
For the last twelve years the people at Auto Net Financial have been helping consumers with bad credit raise their FICO scores and reestablish their car credit by financing a vehicle with a bad credit auto loan. As potential borrowers, one of the things consumers can do to make the transaction go more smoothly is to educate themselves about the subprime car loan process and what they can do beforehand in order to improve their chances of an approval.
As with anything else, the key to a successful bad credit car loan is focusing on the basics. In this case, that includes having the necessary disposable income in order to qualify for a loan so that you will be able to afford the additional monthly payment you will be assuming when you take delivery of a new car.
Income basics
The first thing that needs to be done is to calculate what is known as a debt to income ratio (DTI). To do this, add up all of your reoccurring monthly bills. This total should include your mortgage or rent payments, credit card payments, loan payments and average utility payments.
Once this total has been calculated, divide that figure by your total gross monthly income (the amount shown on your paycheck before taxes and other deductions). This will give you your monthly debt percentage. As a rule of thumb, most bad credit lenders will limit your total monthly debt to 50% of your gross monthly income.
If this percentage amount falls below 50% and there is enough room under this cap for a car payment plus insurance, then you probably have sufficient income to support a bad credit car loan payment. At the same time, you should keep in mind that most bad credit lenders don’t want you to have a car payment (including insurance) that exceeds 15% of your gross monthly income.
As an example, if your monthly gross income is $3,000, your payment for a car plus full coverage insurance can’t exceed $450. Most bad credit lenders will estimate the cost of this coverage at about $100 per month. That would leave a remaining budget of $350 for a car payment.
Additional expenses
If you go to our website, www.autonetfinancial.com, you’ll find a “quick qualifier” that will help you estimate your debt to income as well as what your qualified auto loan amount might be – sort of a car payment calculator. But as you proceed to estimate your monthly expenses, remember that you also need to make room in your new budget for additional expenses such as gas and vehicle maintenance.
If you are planning on buying a used car and don’t plan on purchasing a service contract, you should be setting aside additional money each month for the possibility of major repairs. This is why it’s always a good idea to consider purchasing a service contract if the vehicle you’re buying is out of and why you should include I, along with the price of the vehicle, in the loan contract. By including its cost in your monthly payment, you are automatically taking into consideration unforeseen mechanical problems that could otherwise cost you hundreds or even thousands of additional dollars.
Aim low this time
Keeping your car payment at or even below what you think you can afford is especially important with a bad credit car loan. With the high interest rates that are common with this type of financing, you will be paying much more in interest expenses than a normal car loan.
Also keep in mind that the object of a bad credit car loan is to reestablish your car credit, not finance your dream car. Keep the amount financed as low as possible by purchasing a small to midsize sedan as opposed to a larger car or sport utility vehicle. You should also keep the loan term as short as possible (36 to 48 months) in order to keep the interest expenses down.
Paying on the loan
During the time that you have your bad credit car loan, try and pay more per month than what is stated on the loan contract. When you do this, include a note with your payment or make a notation on the check that indicates the additional amount should be put towards the loan principle. You should also call the loan company and indicate this is what the additional payment is for. In this way, you can pay the loan off earlier and actually decrease the amount of interest that you’re paying.
The bottom line
By being aware of what the pitfalls are in a bad credit auto loan, you can rebuild your credit faster and increase your credit score more quickly while paying the least amount of interest possible on your loan.
For more information about subprime car loans, go to www.autonetfinancial.com. If you need additional assistance, go to the “About Auto Net” tab and click on the “Contact Us” line where you will find our toll free number. Our customer service representatives are available to answer your questions during normal business hours.
