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When you have bad credit and need financing for a vehicle, one option is to go to a high-risk lender, which provides options for individuals with special credit situations and, by not taking into account only your score and credit history, arise other requirements you must meet to get approved.

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These lenders look at several factors in addition to your credit score to make sure you can afford a car loan. Two of those factors are your debt-to-income ratio, known as Debt-to-income and your ratio of payment to income.

 

What is it, and why is it important?

The DTI ratio is a ratio that compares how much you owe each month to how much you earn. Specifically, the percentage of your gross monthly income (before taxes) goes towards rent, mortgage, credit card, or other debt payments.

 

Your debt-to-income ratio tells the lender how much disposable income you have each month. If you don't have enough income left after paying your bills, it can be difficult to qualify for a bad credit auto loan.

 

It is important that the next payment you will incorporate into your monthly budget, that of your vehicle sensibly adjusts to your budget. Lenders want you to be able to pay for your car as it is in the best interest of both parties.

 

How is it calculated?

When it comes to your debt-to-income ratio, lenders impose a 45% to 50% limit on bad credit borrowers. This means that if you are already using more than half of your income to pay your bills, you may not be approved. The lower the DTI ratio, the better.

 

To calculate your DTI ratio, add up all of your monthly bills, including an estimated car loan and insurance payment, and divide the total by your monthly income before taxes. Convert the number to a percentage, and there you have it.

 

When it comes to budgeting for an auto loan, DTI is important, but it's only one piece of the puzzle.

 

What is it, and why is it important?

The payment-to-income ratio shows, as a percentage, how much of your monthly income before taxes are needed to pay off your car loan. Lenders generally don't allow payment to exceed 15% to 20% of your gross income, like the DTI ratio; the lower the PTI ratio, the better.

 

Knowing this ahead of time can help you narrow down your search for vehicles and give you a better idea of ​​what kind of car you can afford.

 

How is it calculated?

Finding your PTI index is also an easy calculation. All you have to do is divide your estimated monthly car loan payment by your monthly income before taxes.

 

You can set your budget by determining your PTI index in advance. Simply multiply your gross monthly income by 0.15 and then by 0.20. This gives you the range of the maximum monthly payment that sub-prime lenders typically allow.

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