Looking for a car loan? Learn more about debt-to-income ratio and how it might affect getting a vehicle loan with this blog post from TDECU.
When you start shopping for a new car, you may envision yourself driving a big, shiny, new vehicle loaded with all the latest features. Before you make a list of all the bells and whistles you want on your vehicle, though, you better first look at how much you can afford to pay each month on a car payment. One way to determine how much you can pay for a new car is to calculate your debt-to-income ratio.
Getting an auto loan is an exciting step, but lenders will carefully evaluate your finances including your debt-to-income (DTI) ratio before approving you. Understanding what DTI is, how to calculate it, and how to improve a high ratio are key to getting the best auto loan rates.
What is Debt-to-Income Ratio?
Your debt-to-income ratio compares your total monthly debt payments to your total monthly gross income before taxes and deductions It is shown as a percentage, with a lower percentage indicating you have more available income to take on an additional debt like an auto loan
There are two main types of DTI ratios lenders look at:
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Front-end DTI – Only includes monthly housing costs like rent/mortgage, taxes, insurance, and HOA fees.
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Back-end DTI – Includes all monthly debt payments like housing, credit cards, personal loans, student loans, auto loans, child support, etc. This is what most auto lenders evaluate.
Back-end DTI gives lenders a comprehensive view of your financial habits and ability to manage additional debt. Along with your credit scores, it helps them determine if you are a risky borrower or not.
How to Calculate Your Back-End DTI
Figuring out your back-end DTI for an auto loan only takes two steps:
1. Add up all your monthly debt payments.
Go through your credit card statements, loan bills, bank account transactions, etc. to find the minimum monthly payments for all your existing debts. These include:
- Mortgage or rent
- Credit cards
- Personal loans
- Student loans
- Existing auto loans
- Child support or alimony
Don’t include daily expenses like utilities, groceries, gym memberships, etc. in your debt payment total.
2. Determine your monthly gross income.
Gross income is your total income before taxes and other deductions. Calculate it by:
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Dividing your annual salary by 12 if you are on a fixed salary.
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Taking your total W-2 or 1099 income from the past year and dividing by 12 if you are paid hourly or are self-employed.
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Adding up 3-6 months of steady bank deposits if you have variable income sources.
You can also include child support, alimony, Social Security benefits, etc. as income if you have documentation showing consistent payments.
3. Divide your total monthly debt by your gross monthly income to get your DTI percentage.
For example:
- Total Monthly Debt Payments: $2,000
- Gross Monthly Income: $5,000
- DTI = $2,000/$5,000 = 40%
What is a Good DTI for an Auto Loan?
Most lenders see a DTI under 36% as a good, manageable amount of debt. But maximum DTI thresholds vary. General guidelines are:
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0-35% – Debt is manageable. Good chance of auto loan approval.
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36-49% – Debt may be hard to handle. Auto loan still possible with good credit.
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50%+ – Debt likely unmanageable. Hard to get approved.
So even if your DTI is not ideal, you may still qualify for an auto loan, especially if you have a long credit history and high credit scores. But expect higher interest rates.
How to Improve Your DTI Ratio
If your DTI is above 43%, improving it before applying for an auto loan can help you access better rates. Here are some tips:
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Pay down current debts – Attack high interest debt first using the debt avalanche method. Or pay off smaller debts first with the debt snowball method.
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Avoid new debts – Hold off on big new loans until you’ve lowered your DTI. Otherwise, you’ll have to settle for a higher rate auto loan.
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Increase income – Bringing in more money from a side job or other source can help lower your DTI quickly. But the income must be consistent.
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Lower interest rates – Look into refinancing or consolidating existing debts at a lower interest rate to reduce monthly payments.
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Lengthen loan terms – Stretching out the repayment timeline on credit cards or other debts can free up monthly cash flow to take on an auto loan payment.
With some focus and discipline, you can get your DTI ratio back to a range that unlocks better auto financing rates and terms.
Our Experience with Auto Loan DTI
Here at LendingTree, we’ve helped match millions of customers with competitive auto loan offers from our lending partners. We’ve seen firsthand how debt-to-income ratio impacts not just loan approval, but also the interest rates and terms you qualify for.
That’s why we recommend having a DTI below 36% before applying for the best auto loan offers. We also suggest getting pre-approved first so you can shop like a cash buyer and negotiate the best possible deal on your new car.
Our online auto loan marketplace makes it easy to compare personalized loan offers from up to 5 lenders without impacting your credit score. If you currently have a high DTI, don’t get discouraged. Use the tips above to take control of your debt and put yourself in a better position to finance the car you want at a great rate.
We’re here to provide the information and tools to help you make smart, informed auto financing decisions. Contact us anytime or pre-qualify online now to get started!
Effects of DTI on a New Auto Loan
When you submit a loan application, your DTI ratio and finances will be evaluated. In general, the lower the DTI ratio, the better chance a borrower has of qualifying for a new car loan. However, DTI is just one of several financial metrics used by dealerships, credit unions, and financial institutions when assessing your financial health. Your credit history and credit score are also key factors.
Following are the most commonly used DTI guidelines indicating a low, or good, debt-to-income ratio versus a bad or higher DTI ratio, typically indicating bad credit.
|
DTI Ratio |
Rating |
Financial implications |
|
35% or less |
Good |
Debt is manageable, and you may be able to save money. Ideal range for a new car loan with the best loan terms. |
|
36% to 49% |
Adequate |
Most lenders cap DTI at 46%. With a good credit report, a new car loan is still possible. |
|
50% or higher |
Bad or poor |
Higher DTI limits your ability to get any loans. |
If your DTI ratio is less than favorable, there are steps you can take to improve your ratio, including reducing your total monthly debt payments by making larger monthly credit card payments to pay down the debt more quickly. You can also consider refinancing or debt consolidation to lower the interest rates on loans or credit cards.
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Looking for a car loan? Learn more about debt-to-income ratio and how it might affect getting a vehicle loan with this blog post from TDECU.
When you start shopping for a new car, you may envision yourself driving a big, shiny, new vehicle loaded with all the latest features. Before you make a list of all the bells and whistles you want on your vehicle, though, you better first look at how much you can afford to pay each month on a car payment. One way to determine how much you can pay for a new car is to calculate your debt-to-income ratio.
How Much Car Can You Really Afford? (Car Loan Basics)
FAQ
What is a good debt-to-income ratio to buy a car?
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Debt-to-income ratio
|
Rating
|
|
0% to 36%
|
Ideal
|
|
37% to 42%
|
Acceptable
|
|
43% to 45%
|
Qualification limits for many lenders
|
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50% and above
|
Poor
|
Is a 7% debt-to-income ratio good?
How much should I spend on a car if I make $100,000?
What is the DTI limit for a car loan?