Getting a new car is an exciting experience. But you need to be approved for an auto loan before you can drive that brand-new car off the lot. Your debt-to-income (DTI) ratio is one of the most important things lenders look at. So how do you figure out your DTI for a car loan?
In this comprehensive guide we’ll walk through the steps to determine your debt-to-income ratio when applying for car financing. Understanding this number and how to optimize it can help ensure you get approved for the best possible interest rate.
What is Debt-to-Income Ratio?
Your debt-to-income ratio shows how much of your monthly gross income goes toward paying off your debts. It’s expressed as a percentage.
For example, if your monthly debt payments total $1,000 and your gross monthly income is $4,000, your DTI is 25% ($1,000/$4,000).
The higher your DTI ratio, the larger the portion of your income that goes toward paying debts. A lower ratio is better when applying for financing.
Why DTI Matters for Auto Loans
Along with your credit score, lenders use your DTI ratio to evaluate your ability to manage monthly car payments.
Borrowers with lower DTIs are seen as lower risk. You have a better chance of getting approved, and you might even be able to get better interest rates.
That’s why it’s important to understand how to calculate your DTI before applying for a car loan. Optimizing this ratio can boost your chances of getting favorable financing terms.
Two Main Types of DTI
There are two primary debt-to-income ratios lenders look at:
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Front-end DTI: This includes just your monthly housing payments like rent/mortgage, property taxes, insurance, and HOA fees.
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Back-end DTI: This broader ratio encompasses all monthly debt obligations including housing costs plus credit card payments, student loans, auto loans, alimony, child support, and more.
Auto lenders focus on your back-end DTI to evaluate your total debt burden. This gives them a more complete picture of your finances.
How to Calculate Your Back-End DTI for a Car Loan
Figuring out your back-end DTI takes just 3 simple steps:
1. Add Up Total Monthly Debt Payments
Make a list of all your current monthly debt payments like:
- Rent or mortgage
- Credit cards
- Auto loans
- Student loans
- Personal loans
- Child support
- Alimony
Add up the minimum monthly payment due for each debt. This is your total monthly debt payment amount.
2. Determine Your Gross Monthly Income
Your gross income is your total pay before taxes and other deductions.
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If you’re salaried, take your annual salary and divide by 12 months.
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For hourly or freelance work, take your total earnings from your W-2 or 1099 form and divide by 12.
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Use 3-6 months of steady bank deposits if income fluctuates.
3. Divide Total Debt by Income
Take your total monthly debt payment amount and divide it by your monthly gross income.
For example:
- Total monthly debt = $1,500
- Gross monthly income = $5,000
- $1,500 / $5,000 = 0.3
- DTI = 30%
This simple calculation gives you your back-end DTI ratio for a car loan application.
What’s Considered a Good DTI for Auto Financing?
Here are general DTI recommendations for car loan approval:
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0-35%: Excellent DTI range. You have a high chance of qualifying for the best rates.
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36-49%: Your DTI is getting high. Approval may be harder and you’ll likely pay higher interest rates.
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50%+: Your DTI is too high. You probably won’t qualify for financing until you improve your ratio.
However, maximum DTI thresholds vary by lender. Check requirements before applying.
How to Improve Your DTI to Get a Car Loan
If your DTI is too high, taking steps to lower your ratio can boost your auto loan approval odds. Here are some tips:
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Pay down current debts to reduce monthly payments. Try the debt avalanche or snowball payoff methods.
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Avoid taking on new debt during the application process so your DTI doesn’t get worse.
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Increase income with a side gig, promotion, overtime, etc. A higher income lowers your ratio.
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Refinance high-interest debt like credit cards to reduce monthly payments.
With a lower DTI, you’ll be in a better position to qualify for affordable car financing.
Estimate Your Car Loan Payment and DTI
You can get an idea of how a potential auto loan may impact your DTI using an online DTI calculator:
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Enter your gross monthly income.
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Input your total current monthly debt payments.
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Add your estimated new monthly car payment.
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The calculator will estimate your new DTI percentage if you took on the additional car loan payment.
This gives you a preview of how a car loan could affect your ratio before formally applying.
Other Key Factors in Auto Loan Approval
While DTI is important, lenders also weigh other variables when deciding whether to approve your application, including:
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Credit score: Your score reflects your overall creditworthiness and history of repaying debts. A higher score helps.
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Down payment: A larger down payment reduces the loan amount needed, making approval easier.
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Loan term: Shorter loan terms mean smaller monthly payments, reducing DTI impact.
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Vehicle factors: Details like mileage, age, and loan-to-value ratio also play a role.
Summing It Up
When applying for auto financing, understanding how to calculate your DTI provides valuable insight into a key factor lenders evaluate.
Optimizing this ratio by paying down debts, increasing income, and lowering payments can significantly improve your chances of getting approved for the best loan terms.
Carefully considering how a car loan may impact your back-end DTI using an online calculator also helps you make smart financing decisions.
While DTI isn’t the only variable in play, monitoring and controlling your debt-to-income ratio is crucial for qualifying for affordable auto loans with favorable interest rates.
What is a good debt-to-income ratio?
Most lenders consider anything below 36% to be a good debt-to-income ratio, but you could have wiggle room. DTI thresholds vary by type of loan and by the lender itself. Still, you’ll find some general guidelines below.
DTI of 0% to 35%: Your debt looks manageable. If your DTI is on the higher end of this scale, you may want to look into ways to become debt free.
DTI of 36% to 49%: Your debt may be becoming hard to handle. You could consider credit counseling. Nonprofits such as the National Foundation for Credit Counseling (NFCC) offer no- or low-cost solutions.
DTI of 50% or more: Your debt is probably unmanageable, it may be time to explore debt relief options. At this stage, it will be hard to find a lender that will approve you.
How to improve your debt-to-income ratio
If your DTI ratio is above 43%, you may need to limit your search to bad credit car loans. But even if you are approved for a car loan, continue to work on your DTI. By improving your DTI (and credit score), you may be able to refinance your auto loan for a better rate later on.
How to Calculate Your Debt to Income Ratios (DTI) First Time Home Buyer Know this!
FAQ
How do I calculate my debt-to-income ratio for a car loan?
Lenders may also consider another calculation: the payment-to-income (PTI) ratio. In this case, you’d add up estimated car loan payments, plus vehicle insurance costs, and divide this figure by your gross income. Here’s how to calculate your debt-to-income ratio for a car loan: Step one: Determine your monthly gross income.
How does debt-to-income ratio affect car loans?
One thing lenders look at is your debt-to-income ratio (DTI ratio), which shows how much money you make each month and how much you spend on paying off your debt. While there’s no set debt-to-income ratio for car loans, knowing how it impacts your loan approval is important. What Is Debt-To-Income Ratio and How Does It Impact Car Loans?.
What is a good debt to income ratio for car loans?
What’s a Good Debt to Income Ratio for Car Loans? Ideally, you want a DTI below 36 percent to have the best chance of getting approved for a car loan with favorable terms. A higher DTI doesn’t necessarily mean you’ll be denied financing, but you could be offered less favorable terms.
How do you calculate monthly debt payments?
Monthly debt payments ÷ Monthly gross income = DTI ratio. As an example, someone with a $1,000 mortgage, $500 car loan, and $500 in credit card debt who earns $6,000 in gross income has a DTI of 33%. Their monthly debt payment is $2,000 ($1,000+$500+$500). The DTI is . 33 ($2,000 $6,000). Multiply by 100 to get the percentage of 33%.
How do I calculate my debt Taxable Income (DTI)?
Here’s what to know about DTI and how to calculate it. To find your DTI, list all the monthly debt payments you have to make, like your mortgage or rent, plus the minimum payments on your credit cards and any other regular payments you make. Then, adjust the slider to match your gross monthly income (total income before taxes and other deductions).
How do you calculate DTI for a car loan?
To find your debt-to-income ratio, or DTI ratio, divide the amount of money you pay each month for debts by the amount of money you make each month. DTI ratio is important when you’re considering a mortgage or buying a car.
What is a good debt-to-income ratio for a car?
Lenders generally prefer a DTI ratio of no more than 36%, but the cutoff can sometimes be as high as 50%. If your DTI ratio is too high to qualify for a loan, you can lower it by increasing your income, reducing your total debt, or both.
How is debt-to-income calculated?
Do car dealerships look at your debt-to-income ratio?
Debt-to-income ratio: Lenders will look at your monthly debt payments and how they compare to your income. Debt-to-income ratio, or DTI, shows how much of your pretax monthly income goes toward debt, such as credit card or loan repayment. In general, auto lenders prefer that applicants have a DTI of 50% or less.