Every lender has its own guidelines when it comes to the right debt to income ratio when they are considering a new auto loan. They also consider what your ratio will be including the monthly payment on the new vehicle. A general guideline is less than 35%, though some subprime lenders use 50% as a maximum threshold. Some lenders will even offer a lower rate if your ratio is lower.
How to Calculate Your Debt to Income Ratio (DTI)
If you want to get an idea of what you current ratio is, add the following numbers together:
- Current rent/mortgage amount
- All installment loan payments
- Student loan payments
- Credit card payments
Next, divide this sum by your gross monthly income. As an example, if you spend $1500 on monthly debt payments, and you earn $4000 per month, you have a debt-to-income ratio of 37.5%.
Budgeting for Your Car Loan
Although a lender will not consider your other monthly expenses – i.e. groceries, fuel, etc – as part of your debt/income ratio, you may want to. Taking on too much auto-related debt can make these other necessities difficult to afford. That strain can affect your willingness to repay your auto loan. After all, no one wants to be “payment poor.”
On average, car payments account for 11% of the American consumer’s monthly income. However, this is too much. A good rule of thumb is to allocate no more than 5-8% of your monthly income toward your car payment. If you are calculating your budget based on your household income, make sure to apply this percentage toward all of your vehicle payments.
Car Loans with High Debt-to-Income Ratio
If you have a high DTI, it may not be an ideal time to take on a new loan. After all, it just results in more debt. If possible, you might be better off paying down some of your existing debt first. That said, we have many dealers and lenders in our network who approve people with ratios of up to 50%. Go here to apply online for financing. Be sure to opt for an affordable vehicle with low monthly payments, so as to minimize the increase in your debt-to-income ratio.