How to Calculate and Improve Your Car Loan Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is an important factor lenders consider when you apply for a car loan. It gives them an idea of how much debt you currently have compared to your income. Generally, the lower your DTI, the more likely you’ll be approved for affordable car loan rates.

In this comprehensive guide, we’ll explain what debt-to-income ratio means, how to calculate yours specifically for a car loan, what’s considered a good or bad DTI, and most importantly – how to improve a high DTI so you can qualify for better auto financing.

What is Debt-to-Income Ratio?

Debt-to-income ratio measures your monthly debt payments against your monthly gross income. It’s shown as a percentage.

There are two main types of DTI ratios lenders look at:

• Front-end DTI – Your monthly housing costs as a percentage of income. This includes your rent or mortgage payment plus related expenses like property taxes and homeowners insurance.

• Back-end DTI – All of your monthly debt obligations as a percentage of income. This includes housing costs plus car loans, student loans, credit cards, personal loans, and other debts.

Auto lenders specifically review your back-end DTI to determine if you can afford a new car payment Front-end DTI is more commonly checked for mortgage lending,

How to Calculate DTI for a Car Loan

Figuring out your debt-to-income ratio is simple if you have the right information handy. Here’s how to calculate your back-end DTI for a car loan

Step 1 Add up all of your current monthly debt payments This includes

• Rent or mortgage
• Credit card minimum payments
• Auto loans
• Student loans
• Personal loans
• Child support
• Any other debts with a monthly payment

Step 2: Calculate your gross monthly income. This is your income before any taxes or deductions are taken out.

• If you’re salaried, take your annual salary and divide by 12.
• If you’re paid hourly, calculate your monthly average earnings based on recent pay stubs.

Step 3: Divide your total monthly debt (from Step 1) by your gross monthly income (from Step 2).

This final number is your debt-to-income ratio. It’s best displayed as a percentage.

For example:

• Monthly debt payments: $1,500
• Gross monthly income: $4,000
• $1,500 / $4,000 = 0.375
• DTI = 37.5%

So in this scenario, the back-end debt-to-income ratio is 37.5%.

What’s a Good DTI for an Auto Loan?

A good DTI for a car loan will vary slightly between lenders, but here are some general guidelines:

• 0-35% – Excellent DTI. You should have no trouble being approved for the best auto loan rates.

• 36-49% – Moderate DTI. You can likely still qualify for a car loan, but may not get the rock bottom interest rates.

• 50%+ – High DTI. This signals too much existing debt and you may have trouble being approved. Expect higher rates if you are.

According to research from the Consumer Financial Protection Bureau, the average auto loan DTI is around 19%. So anything under 35% is generally considered a good ratio by lenders.

The higher your DTI, the riskier you look to lenders when taking on additional debt for a car. A lower ratio conveys that you have more available income to comfortably handle a new monthly car payment.

How to Improve Your Car Loan DTI

If you calculate your DTI and find it’s higher than you’d like, here are some tips to improve your ratio before applying for auto financing:

Pay down existing debts – By paying off credit cards, student loans, or other debts your monthly payments will decrease. This lowers your DTI. Consider using the debt avalanche or snowball methods.

Avoid taking on new loans – Don’t open any new credit cards or financing until after you’ve been approved for a car loan. New debt obligations will drive your DTI higher.

Increase your income – Boost your monthly gross income by taking on a side gig, asking for a raise at your main job, or finding a higher paying position. More income makes your ratio look better.

Extend loan terms – You may be able to lower your monthly payments on some debts by extending the loan length. This reduces the payments used to calculate DTI.

Refinance existing loans – See if you can get a lower interest rate by refinancing your current debts, especially auto loans. Lower rates = lower payments = improved DTI.

With a combination of these strategies, you should be able to reduce your debt-to-income ratio over time to qualify for the best possible rates on your next car loan. Be sure to double check your DTI before submitting any auto loan applications.

The Takeaway

Your debt-to-income ratio compares your total monthly debt payments to your gross monthly income. Auto lenders review your back-end DTI specifically to determine if you can handle a new car payment.

Aim for a DTI of 35% or less to qualify for the best car loan rates and terms. If your ratio is higher, take steps pay down debts, increase your income, refinance, or take other measures to improve your DTI over time.

Knowing your car loan DTI and taking steps to optimize it where possible will ensure you get approved for affordable auto financing.