How Debt to Income Ratio Affects Your Chances of Getting Approved for a Car Loan

Getting a new car is an exciting experience. But before you start browsing dealership lots, you need to make sure you can actually get approved for an auto loan. One of the most important factors lenders consider is your debt to income ratio (DTI). I’ll explain what DTI is, how it’s calculated, and how it affects your car loan application.

What is Debt to Income Ratio?

Debt to income ratio compares the amount you owe each month to the amount you earn. To calculate DTI, you divide your monthly debt payments by your gross monthly income.

For example. let’s say you have

• Mortgage payment: $1,000
• Credit card minimum payments: $200
• Student loan payment: $300
• Gross monthly income: $4,000

Your total monthly debt payments are $1,000 + $200 + $300 = $1,500

$1,500 / $4,000 = 0.375

0.375 x 100 = 37.5% DTI

So your debt to income ratio is 37.5%.

Debt payments included in the DTI calculation are:

• Mortgage or rent
• Credit card minimum payments
• Auto loans
• Student loans
• Personal loans
• Child support or alimony
• Other debts like medical bills or legal fees

Your gross income includes your total pay before taxes and deductions. So you would include:

• Wages from full-time and part-time jobs
• Self-employment or freelance income
• Social security benefits
• Pension payments
• Rental income

How Lenders Use DTI

When you apply for a car loan, lenders will calculate your debt to income ratio. They want to see how much of your income is already tied up in existing debts.

Borrowers with high DTIs may have trouble managing another monthly car payment. Data shows that consumers with excessive debt burdens are more likely to become delinquent or default on debts.

That’s why most lenders have a maximum allowable DTI for auto loan approval. Common requirements are:

• 36% DTI or less – Excellent approval odds
• 36-49% DTI – May get approved but under stricter terms
• 50%+ DTI – High risk of denial

In addition to DTI, lenders evaluate other factors like your credit scores, income, and existing assets. But DTI is a major component of the approval decision.

Tips for a Strong Car Loan Application

If your DTI is too high, improving it before you apply can really boost your chances of getting approved. Here are some tips:

• Pay down balances – Especially credit card debt. This lowers your minimum payments that count toward DTI.

• Pay off installment loans – Eliminating a monthly student loan, personal loan, or auto loan payment makes a big dent in DTI.

• Consolidate higher rate debts – You can roll multiple payments into one lower monthly payment via debt consolidation.

• Increase income – Making more money lowers your DTI. Consider a side gig to temporarily increase income.

• Have a down payment – The larger your down payment, the lower the monthly car payment and impact on DTI.

• Add a co-signer – An applicant with better credit and income can improve your approval odds.

Sample DTI Scenarios and Approval Odds

Here are some fictional examples to show how DTI could impact your auto loan application:

Borrower 1:

• Monthly income: $5,000
• Existing debts:
  • Rent: $1,500
  • Student loan: $200
  • Credit card minimum: $100
• Total monthly debt: $1,800
• DTI: 36% ($1,800/$5,000)

With a DTI of 36% or less, this borrower has a great chance of approval. Their remaining income after debts leaves plenty of room to manage a car payment.

Borrower 2:

• Monthly income: $4,000
• Existing debts:
  • Mortgage: $1,400
  • Auto loan: $300
  • Personal loan: $250
  • Credit cards: $450
• Total monthly debt: $2,400
• DTI: 60% ($2,400/$4,000)

A DTI over 50% will make approval very difficult, unless the applicant has strong income and top-tier credit scores. This borrower is probably better off waiting until they pay down debts.

Borrower 3:

• Monthly income: $3,500
• Existing debts:
  • Rent: $1,000
  • Student loans: $250
  • Credit card: $200
• Total monthly debt: $1,450
• DTI: 41% ($1,450/$3,500)

With a DTI in the 40-49% range, this borrower may get approved but pay a higher interest rate or need to put more money down. Improving their DTI could get better loan terms.

As you can see, DTI makes a big impact on the lender’s decision. It provides a snapshot of your current financial situation and ability to take on additional payments.

How to Calculate Your Own DTI

Figuring out your own debt to income ratio is simple:

Step 1) Add up all of your monthly debt obligations. This includes any fixed payments like home, auto, and student loan payments. Don’t forget smaller debts like credit cards, medical bills, or legal expenses.

Step 2) Calculate your gross monthly income. This is your total pay before any deductions or taxes.

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

Step 4) Multiply the result by 100 to express DTI as a percentage rather than a decimal.

Running the numbers will help you understand how lenders view your application. You can get a free DTI calculation with any prequalification from an online lender like LendingTree or Lightstream.

Ideal DTI Range for Car Loan Approval

As a general guideline for auto financing:

• Excellent DTI – 36% or lower
  • Very good chance of approval
  • Likely to get lowest rates/best terms
• Good DTI – 36-42%
  • Still likely to get approved
  • May pay slight rate premium
• Fair DTI – 43-49%
  • Approval possible but not guaranteed
  • Will pay higher rates or need larger down payment
• Poor DTI – 50% or higher
  • Very low approval odds without perfect credit
  • Expect much higher rates or outright denial

Of course, DTI isn’t the only factor lenders evaluate. Even with a high DTI, you may still get approved if you have a high income, large down payment, or great credit history.

But improving your DTI ahead of time will significantly boost your chances and let you negotiate better loan terms. Aim for a DTI of 36% or less before applying.

Other Debt Ratios Important for Auto Loans

In addition to your overall DTI, lenders may look at two other debt ratios specific to car loans:

Auto Debt Ratio

Your auto debt ratio compares your proposed monthly car payment to your gross monthly income. Most lenders limit this ratio to 10-15%.

For example, if you make $4,000 per month, your new car payment should be under $400-$600 to get approved. This ensures your total vehicle expenses don’t consume too much of your earnings.

Vehicle Payment-to-Income Ratio (PTI)

PTI considers your total monthly auto expenses (not just the loan payment) relative to income. It includes factors like:

• Proposed car loan payment
• Existing auto loan payments
• Insurance premiums
• Fuel costs
• Maintenance

Having high vehicle expenses exceeding 15-20% of income is seen as a sign of financial stress.

How to Improve Your Chances of Auto Loan Approval

Reducing your DTI and other debt ratios should be your top financial priority before applying for a car loan. This will ensure you get the lowest rate and smoothest approval process.

Here are some tips for lowering debt and maximizing approval odds:

• Pay down credit card and other high interest debt
• Make extra student loan or auto loan payments
• Work overtime or pick up a side gig
• Reduce non-essential expenses and entertainment costs
• Ask lenders about credit report errors dragging your score down

Even small steps to pay off debt and increase income can make a difference. Aim to get your DTI below 36% before submitting a loan application.

Shop around with online lenders to compare personalized rate quotes. Applying with multiple lenders also improves your chances, especially if you have fair credit.

Consider having a well-qualified co-signer with income and credit history to complement yours. This provides extra assurance to the lender.

Weigh the Total Deal, Not Just Monthly Payment