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A woman getting a car loan

Debt-To-Income Ratio for a Car Loan

Lenders use several different metrics to determine whether or not it’s safe to lend you money through products like car loans. One such metric is the debt-to-income ratio for car loans, also known as the DTI ratio.

Understanding the DTI ratio and how it works can help you maximize your chances of getting approval. This guide will help you do that.

Key Takeaways

  •  Debt-to-Income (DTI) ratio is your all debt divided by your income expressed as a percentage.
  • A DTI over 50% is not good and may impact your ability to get a reasonable car loan.
  • To lower your DTI, you'll need to pay off your debts or increase your verifiable income. 

How Debt-To-Income Ratio for a Car Loan Works

Whether you want to get a car loan from your local bank or at the dealership, one thing’s for sure: you must understand how lenders will assess your creditworthiness.

By knowing and understanding the process you’ll go through to get a loan, you can take steps to maximize your chances of getting approved and receiving the money you need.

In this case, we’re talking about one specific metric lenders use when providing car loans: the debt-to-income (DTI) ratio.

Keep reading to learn more about this metric and why it’s crucial to your ability to get a car loan.

What Is a Debt-To-Income Ratio?

  • The debt-to-income or DTI ratio is a financial metric or a tool that lenders use to decide whether or not you’re a safe borrower. It is calculated by dividing your total monthly debt payments by your gross monthly income, giving lenders a clear picture of how much of your income goes toward debt repayment.
    • For example, if your monthly debts (including mortgage, car loans, student loans, and credit card payments) total $2,000 and your gross monthly income is $5,000, your DTI ratio would be 40%. This means 40% of your income is committed to debt repayment.
  • Lenders use the DTI ratio to gauge your ability to manage monthly payments and repay the money you intend to borrow. A high DTI ratio suggests you have a significant debt burden relative to your income, which may indicate a higher risk of default.
    • For instance, if you have a DTI ratio above 50%, lenders might worry that you won't be able to afford additional debt payments on top of your existing obligations, making you a risky borrower.
  • Conversely, a lower DTI ratio indicates that your debt is manageable in relation to your income. For example, a DTI ratio of 20% suggests that only a small portion of your income goes toward debt repayment, signaling to lenders that you are more likely to handle additional debt responsibly. This can result in more favorable loan terms and a higher likelihood of loan approval.

Overall, lenders will likely use the DTI ratio and other metrics to determine how much of a risk you pose to them, whether or not they should give you a car loan, and how lenient the loan terms should be.

DTI for car loan infographic

How To Calculate Debt-To-Income Ratio For Car Loans

You don't need to wait for a car loan provider to tell you your debt-to-income (DTI) ratio; you can calculate it yourself to understand your financial standing. However, before diving into the DTI ratio, it's essential to understand another critical metric: the payment-to-income (PTI) ratio. Confusing these two ratios can lead to misconceptions about your creditworthiness.

  • Payment-to-Income (PTI) Ratio. The PTI ratio measures the percentage of your monthly income that goes towards your monthly car payment. Lenders use this ratio to ensure that your car payment is affordable relative to your income. For example, if your monthly car payment is $500 and your gross monthly income is $5,000, your PTI ratio would be 10%.
  • Debt-to-Income (DTI) Ratio. Now, let’s focus on the DTI ratio. This ratio includes all your monthly debt payments, not just your car payment, providing a broader view of your financial obligations.

Here’s How To Calculate DTI

First, list all your recurring debts such as mortgage, car loans, student loans, credit card payments, and any other regular debt obligations, like so:

  • Mortgage: $1,200
  • Car Loan: $300
  • Student Loans: $250
  • Credit Card Payments: $150

Next, calculate your total monthly debt payments.

  • Total monthly debt payments: $1,200 + $300 + $250 + $150 = $1,900

Then, determine Your Gross Monthly Income: (This is your total income before taxes and other deductions).

  • Gross Monthly Income: $5,000

Lastly, calculate Your DTI Ratio: Divide your total monthly debt payments by your gross monthly income and multiply by 100 to get a percentage.

  • DTI Ratio = ($1,900 / $5,000) x 100 = 38%

A DTI ratio of 38% means that 38% of your gross monthly income is used for debt repayment. Lenders typically prefer a DTI ratio below 40%, indicating that your debt is manageable relative to your income.

By understanding both the PTI and DTI ratios, you can better gauge your financial health and improve your chances of securing a car loan with favorable terms.

What Is Payment-To-Income Ratio (PTI)?

As stated above, the payment-to-income (PTI) ratio is a measurement that financial lenders use to see how much of your regular income is used to service your debts. That includes regular payments for your credit card bills, mortgage, loans, and any other form of debt that you might have.

While the DTI ratio helps show lenders the "big picture" of how much debt you have compared to your income, the PTI ratio gives them a much more detailed view. The PTI ratio helps them understand how much of your regular disposable income goes towards paying debt and whether or not you’ll have enough to service a car loan if they approve you for one.

What Is a High Debt-To-Income Ratio?

Calculating your DTI ratio is pretty straightforward and can be done in just a few minutes. But the more important thing you must understand is what your ratio means to car loan providers.

Here’s what you need to know about different DTI ratio levels:

  • 0% to 35%. DTI ratios that fall within this range are generally considered to be low. A car loan provider who sees this will more likely view you as a safe lender, giving you the best chances of getting approved.
  • 36% to 49%. If your DTI ratio falls within this range, it probably means you’re already managing a few different debts. Lenders might be concerned with how you’ll manage taking on a potential car loan, but it’s still possible to get approved.
  • Over 50%. A DTI ratio above 50% is widely viewed as being too high. In other words, the debt you already have is larger than half of your gross income. Some lenders might still be willing to give you a car loan, but it’ll certainly be more challenging for you to get approved without stricter terms and higher costs.

All of this is also another reason why you should calculate your DTI ratio before pursuing a car loan. If you find that your DTI ratio is high, you can put a plan in place to improve it before you try to get a car loan.

How To Improve Your DTI

Don’t worry if your DTI ratio seems high right now. The good news is that the ratio can be controlled, meaning you can improve it with some time and effort.

Remember: your debt-to-income (DTI) ratio is calculated by dividing your total debts by your gross income. With that in mind, here are three things you can do to improve your DTI ratio:

Stop Taking New Debts

First and foremost, you must prevent your DTI ratio from getting any higher by avoiding new debts. That means not adding any more charges to your credit cards or taking out any more loans.

Doing this successfully will set the stage for the next two steps, which will help you improve your DTI ratio over time.

Pay Down Existing Debt

Once you’re no longer taking on any new debts, you can actively improve your DTI ratio by paying down your existing debts.

Simply put, the more debt you pay off, the better your DTI ratio will become. Two of the most popular debt-payment strategies are the debt snowball (paying off debts with the smallest balance first) and the debt avalanche (paying off debts with the highest interest rates first).

Pick an approach that you’re comfortable with and stick with it for the best results! 

Increase Your Income

Aside from paying down your existing debts, you can also improve your DTI ratio much faster by increasing your income.

For instance, that could mean taking on additional responsibilities at work or starting a profitable side hustle.

How To Get a Car Loan with a High Debt-To-Income Ratio

Suppose you discover that you have a high debt-to-income ratio. In that case, getting a car loan will still be possible, though it’ll more likely be challenging for you.

Depending on your lender, here are some ways you could work around your high DTI ratio:

  1. Down payment. Lenders might view your high DTI ratio as a sign that lending money to you is risky. So, one workaround is to put a much larger down payment on the vehicle you want to purchase, thereby reducing the financed amount. Borrowing less from a lender makes you a much lower financial risk to them.
  2. Credit score. Your DTI ratio is only one indicator of your creditworthiness. Another one is your credit score, which you can work on improving to raise your chances of getting a car loan.
  3. Co-signer. Alternatively, you can find a friend or family member with better credit who can be your co-signer. Some lenders are more willing to work with you if you have one.
  4. Lower DTI. If you can’t or prefer not to use the approaches above, the best thing you can do is lower your DTI ratio. Stop taking on new debts, pay off your current ones, and increase your income if possible.

Understanding the topic of your debt-to-income ratio for a car loan is crucial because it affects your ability to get approval. Lenders use the metric to determine how much of a debt burden you have and whether or not to give you a car loan. Remember that having a high DTI ratio is not the end of the road for you. You can take steps to lower your DTI ratio and still find lenders willing to work with you regardless of how high it might be.

Another option, if a car loan seems a little too cumbersome or your DTI is pretty tough to lower given your financial situation, you might want to consider a personal installment loan to cover the cost of your car. Simple Fast Loans has online installment loans up to $3,000 that can cover the cost of a used car. So, if conventional financing is not possible due to your DTI, try an online installment loan for fast cash with more lenient approval requirements. 

Related Frequently Asked Questions (FAQs)

As you navigate your debt-to-income ratio and other car loan matters, remember that the most important thing is to learn as much as you can.

Can You Get a Car Loan If You Have a High Debt-To-Income Ratio?

Yes, you can still get a car loan even if you have a high debt-to-income (DTI) ratio. However, you must understand that the process could be more challenging for you and involve loan terms that are stricter and more expensive.

How Does Your Debt-To-Income Ratio Affect Buying a Car?

Your debt-to-income (DTI) ratio shows lenders how much debt you’re currently managing relative to your income. From there, they’ll get an idea of how likely you are to service a car loan if they give one to you. A lower DTI ratio suggests you’re safer to lend to, but a higher one might mean you’ll have problems servicing a car loan.

What Is the Maximum DTI for a Car Loan?

Car loans have no universal maximum DTI ratio, as each lender decides that for themselves. Still, it’s safe to assume that most lenders prefer DTI ratios below 36%, which is considered less risky for them.

As you read earlier, some lenders will still give car loans to people with high DTI ratios. However, they’ll likely have stricter requirements or charge more for the risk they take doing so.

Can You Get a Loan with 50% DTI?

A 50% DTI is considered high, so lenders will view you as a risky borrower. Still, some lenders are willing to take the risk of giving you a car loan.

They’ll probably make it worth it by charging you more for that loan and requiring stricter approval requirements.

Can You Buy a Car with No Credit?

Yes, of course, you can buy a car with no credit at all. There are several ways you can do that:

  • Cash. Naturally, you won’t need any credit if you buy a car by paying cash. The challenge in doing so is collecting enough cash to pay for a car outright. That might be easier to do with a used vehicle, though less likely with a brand-new one.
  • Co-signer. If you have no credit, a co-signer with good credit could still help you get a car. That person could be a close friend or relative who trusts you enough to help you get a car this way.
  • Specialist lenders. Lastly, you can find specialist lenders who offer car loans for people with no credit history. Some places have more of these lenders than others, so do your research to see which ones you can access!

When it comes to buying a car, remember to stay optimistic. No matter what your credit looks like, there’s likely a solution to help you get the vehicle you need.

What Is APR on a Car Loan?

The Annual Percentage Rate (APR) on a car loan represents the annual cost of borrowing money, expressed as a percentage of the loan amount. The APR includes not only the interest rate but also any fees or additional costs associated with the loan, providing a more comprehensive view of the total cost of financing. 

  • Interest rate. The base rate charged by the lender for borrowing the principal amount.
  • Fees. Includes application fees, origination fees, processing fees, and any other costs that the lender may charge.
  • Additional costs. Could include costs for optional services like extended warranties or loan insurance, if bundled into the loan.

The APR is a crucial factor to consider when comparing car loans because it reflects the true cost of borrowing. Unlike the nominal interest rate, the APR accounts for all the additional charges, giving you a clearer picture of what you will pay over the life of the loan.

Can You Get a Car Loan Without a Job?

Getting a car loan without having a job is certainly possible. However, doing so has its fair share of challenges. It’s not that unusual to get a car loan without a job. That’s because many car buyers have other sources of income, such as their savings, investments, or government assistance. 

Meanwhile, some also have irregular incomes, like freelancers and gig workers. You can get a car loan without a job by searching for lenders who accept people with different incomes. So, compare your options or speak to their representatives to know more

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