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

Debt-To-Income Ratio for a Car Loan: How It Works
Kelly Boyer Sagert
Kelly Boyer SagertUpdated August 19, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
As you shop for a vehicle and a lender, you’ll probably hear plenty of talk about debt-to-income ratio, which is your monthly debt payments compared to your gross monthly income. This is important when it comes to car loans, as it helps lenders determine your risk as a borrower.You may be wondering now, what’s a good debt-to-income ratio for a car loan? And if yours isn’t great, do high debt-to-income ratio auto loans exist? This post will answer these questions and much more.

What Is a Debt-to-Income Ratio?

Often shortened to DTI, a debt-to-income ratio is a financial calculation that indicates the percentage of your gross monthly income (meaning, income before taxes) that goes toward monthly debt payments. Lenders like to see a low DTI ratio because that indicates a better balance between what’s coming in and what’s going out, and will reduce the lender’s levels of risk. A high DTI, meanwhile, can indicate that a borrower has too much debt for the amount of money that they’re earning.

Front-End Ratio

Front-end ratio, a more niche type of DTI, calculates the percentage of a borrower’s gross income that’s needed to cover housing costs. This can include a rent payment, or it can be a mortgage payment with taxes and insurance included in the front-end ratio calculation.

Back-End Ratio

This DTI type determines how much of the person’s gross income is going toward non-housing-related monthly debt, such as car loans, student loans and credit card bills. It’s also expressed as a percentage.

What Might Auto Lenders Consider When Applying for Car Financing?

Although lenders may vary in their precise requirements, here are common factors that they may consider when someone applies for a car loan:
  • Credit score: A good credit score score (the FICO credit score model defines that as 670 or higher) makes it easier to get approved and with better car loan terms, including the interest rate and APR (important car loan terms to know).
  • Debt-to-income ratio: Different lenders have different DTI guidelines; there’s more information later in this post about what’s considered a good score and what’s considered a high ratio.
  • Employment history: Stability in your employment is a good sign to lenders. 
Lenders may also consider another calculation: the payment-to-income (PTI) ratio. In this case, you’d add up estimated car loan payments, plus vehicle insurance costs, and divide this figure by your gross income.

How to Calculate Your Debt-to-Income Ratio for a Car Loan

There are debt-to-income ratio for car loan calculators available, but it’s also easy to calculate yourself.Step one: Determine your monthly gross income. You can use your pay stubs to calculate this, but be sure to use the pre-tax amount. If you get paid weekly, multiply that amount by 52 (weeks of the year) and then divide it by 12 (months of the year).Here’s an example: If your gross weekly pay is $700, then $700 x 52  / 12 = $3,033 in monthly gross income.If you have a salary of $50,000 a year, then just divide that by 12, which comes out to a monthly gross income of $4,167.Step two: Make a list of all of your monthly debt payments. This would include:
  • Rent or your mortgage payment with taxes and insurance
  • Car payments
  • Student loans
  • Personal loans
  • Credit card minimum payments 
You should be able to gather this information through your monthly online or paper billing statements; as needed, ask lenders for assistance. Then, add up all of these payments. Let’s say that they equal $1,200. Step three: Calculate the DTI. In the case of the hourly wage earner example above, that would be $1,200 / $3,033 = 39.6%. With the salaried employee, this would be $1,200 / $4,167 = 28.8%.Now here’s a look at calculating PTI.Step one is the same as with DTI. In step two, only add together the payment for your new auto loan and the insurance; you may need to estimate figures, perhaps by using auto loan calculators. For this example, let’s say that yours is $450. Then, divide this amount by your gross monthly income. For the hourly worker in our example, that would be $450 / $3,033 = 14.8%. For the salaried employee, that would be $450 / $4,167 = 10.8%.

What Is Considered a Good DTI Ratio for an Auto Loan?

The short answer is that this depends upon the lender. The Consumer Financial Protection Bureau (CFPB) lists a maximum of 43% when referring to mortgage DTIs, sharing how studies indicate that borrowers with a higher DTI are more likely to struggle to make their monthly payments. So, that can be used as a general benchmark for a person’s finances.Traditionally, a DTI of 36% or lower has been preferred by lenders although they may still choose to make loans to those with a DTI above that percentage. 

What Is a High Debt-to-Income Ratio Auto Loan?

Again, each lender can decide how much risk they’ll take with a borrower and what they consider to be too risky. Some lenders will offer high debt-to-income ratio auto loans while others will not. DTIs of above 50% are often considered high risk. 

Lowering Your Debt-to-Income Ratio

Since this ratio consists of dividing one figure (monthly debt) by another (gross monthly income), there are two broad ways to reduce your DTI: lower your monthly debt or boost your gross monthly income — or use a combination of the two strategies.Ways to boost income are to:
  • Ask for a raise
  • Work overtime
  • Boost your skills and education to qualify for a promotion
  • Work a side gig
To decrease debt, you can tighten your belt and only spend what’s necessary, and then put the extra funds on credit cards or other debts. If you’ve got a loan with a high monthly payment but a relatively low balance, as just one example, paying it off can lower your DTI.As another strategy, if you could pay off the loan on your current vehicle, you could benefit from the full trade-in value when it’s time to buy another one. If this sounds intriguing, here are tips for paying off your car loan — tips you can also use to accelerate the payoff on the cars you buy in the future.

Does Your Debt-to-Income Ratio Have an Affect on Your Credit Score?

According to the credit agency Experian, the direct answer is “no.” That’s because credit bureaus do not track a person’s income, which means they wouldn’t have all of the necessary pieces of information to calculate someone’s DTI. Credit scoring systems do, however, track a person’s overall amount of debt, which is the other key factor in a DTI ratio. This means that a person’s DTI score could have an indirect impact on their credit scores.Other factors that go into a person’s credit score include:
  • The number of loans/credit accounts you have and their types (the “credit mix”)
  • How much of your available credit card limits you’re currently using (your “utilization”)
  • Your payment history, including whether debts are paid on time and in full 

Other Ways to Lower Your Car Financing Payments

If you can make a larger down payment through cash and/or by trading in another vehicle, then you can have a lower car payment (given that the term remains the same in both cases).Let’s say that you’re buying a car that costs $35,000. The interest rate on the loan is 4.5% and the term is 60 months. Here are principal and interest payments at a variety of down payment levels:
  • No down payment: $653 per month
  • $5,000 down payment: $559 per month
  • $7,000 down payment: $552 per month
  • $10,000 down payment: $466 per month
The monthly payment ranges between $466 and $653 — a difference of $187 per month. Over the life of the loan, this can mean paying significantly less in interest. This resource on auto loan amortization can help you compare payment schedules under a variety of circumstances. If you’re currently looking to lower your car payment (meaning on one you own right now), it can help to investigate refinancing your loan. If you can get a better interest rate, that can save you money.

The Takeaway

Understanding the specifics of a debt-to-income ratio for car loans and how to calculate yours can help to streamline the car buying process. If after calculating your DTI you’ve discovered yours is on the higher end, there are strategies you can take to manage your DTI to make it easier to buy a car at a better rate.Your DTI also is a factor when it comes to refinancing your auto loan. If you’re interested in exploring car loan refinancing, you can fill out one simple application at Lantern by SoFi and receive multiple offers from lenders in our network.
Photo credit: iStock/torque

About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
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