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Debt-to-Income Ratio for Auto Loans Explained

Debt-To-Income Ratio for a Car Loan: How It Works
Kelly Boyer Sagert
Kelly Boyer SagertUpdated December 23, 2023
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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.
Your debt-to-income ratio 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.Keep reading to learn what a good debt-to-income ratio is for a car loan, how this ratio affects getting a car loan, what to do if your debt-to-income ratio is high, and more.

What Is a Debt-to-Income Ratio?

Debt-to-income ratio, or DTI, is a financial calculation that indicates the percentage of your gross monthly income (meaning, income before taxes) that goes toward monthly debt payments. Monthly debt payments include your rent or mortgage, auto loans, student loans, child support and alimony, credit cards, and more.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.

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 (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.
  • Debt-to-income ratio: Different lenders have different DTI guidelines; however, most will want to see a DTI ratio no higher than 46% (ideally, 35% or less).
  • Employment history: Stability in your employment and income 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

Here’s how to calculate your debt-to-income ratio for a car loan: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. 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%.Lenders will then want to make sure your new monthly car payment will not raise your debt-to-income ratio too high. If it takes it above 46%, you may be denied an auto loan.

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

According to Experian, lenders do not want to see a DTI ratio for an auto loan above 46%. However, this will vary by lender.Ideally, lenders want to see a DTI ratio at or below 35%, as this means there is plenty of room in your budget to make your new monthly auto payment. A low DTI ratio means you’re less risky to lenders, and you may qualify for better rates and terms.Recommended: Car Loan Requirements

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 toward 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 Affect Your Credit Score?

Your debt-to-income ratio includes your income, and therefore does not directly have an impact on your credit score. 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 affect 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 
Recommended: How Car Loans Affect Your Credit Score

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 auto loan. If you can get a better interest rate, that can save you money each month and over the life of the loan, assuming your loan term remains the same.Recommended: What Type of Credit Is an Auto Loan?

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, all with no obligation to you.

Frequently Asked Questions

What is a good debt-to-income ratio for buying a car?
Can you get a car with a high DTI?
Is a 20% debt-to-income ratio good?
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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