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What Is a Debt-to-Income Ratio for Car Loans?
According to a 2024 survey, almost one-third of Americans don't believe they would get approved for car loans if they applied for them today. Many suspect their credit scores are too low to seek loans through lenders that specialize in providing financial services for car dealers.
Having a good credit score is, of course, a key factor in getting approved for a car loan. However, it's just as important to maintain a good debt-to-income (DTI) ratio when applying for car loans. At Edge Financial Services, we understand that even if your credit score is on the lower end, a strong DTI ratio can still improve your chances of securing the financing you need.
Understanding What a Debt-to-Income Ratio for Car Loans Is
The debt-to-income ratio for car loans is a number that represents how much monthly income you generate versus how much monthly debt you face. It's designed to show a lender that finances vehicle purchases whether or not you can afford to make a monthly car payment after covering the costs associated with all your other debt payments.
There are two key types of DTI, including front-end DTI and back-end DTI. Front-end DTI refers to monthly housing costs, including mortgage payments, property insurance, HOA fees, and taxes. Back-end DTI refers to debt payments, such as student loan debt, credit card debt, and auto loan debt.
Car loan companies typically focus on back-end DTI versus front-end DTI since it more accurately illustrates your ability to repay an auto loan.
Calculating a Debt-to-Income Ratio for a Car Loan
Fortunately, calculating the debt-to-income ratio for car loans is easy. To do it, simply follow these steps:
- Add up all your monthly debt expenses.
- Add up all your monthly income.
- Divide your monthly debt expenses by your monthly income to get your DTI.
Let's say, for example, you have $1,785 in monthly debt expenses and $6,500 in monthly income. When you divide your monthly debt expenses by your monthly income, you'll find that your DTI is 0.275, or 27.5%. This number is often every bit as important to a car loan lender as your credit score.
Determining a Good Debt-to-Income Ratio for a Car Loan
Every lender that provides car loans views debt-to-income ratios a little bit differently. But generally speaking, most lenders will tell you that anything below 36% is considered a "good" DTI. This number suggests you can manage a car payment on top of all your other debt obligations.
That being said, where your DTI falls in between 0 and 36% could impact the interest rate you get on a car loan. New interest rates are always fluctuating for car loan seekers.
Improving a Debt-to-Income Ratio for a Car Loan
If your debt-to-income ratio for a car loan is between 36% and 49%, you might still have the chance to find a lender willing to extend financing to you. However, many people with DTIs over 36% will struggle to secure car loans, even if they have excellent credit scores.
If you ever find yourself dealing with this problem, work on improving your debt-to-income ratio for car loans. Here are several ways you can do it:
- Pay off as much of your debt as you can.
- Steer clear of taking on new debt.
- Increase your income to make your debt more manageable in the eyes of lenders.
Just like with your credit score, you can't necessarily change your DTI overnight. But you can improve it gradually by getting your debt under control and/or looking for ways to give your income a boost.
Having a Tough Time Getting Approved for a Car Loan? Let Us Help
Borrowers need to have a good debt-to-income ratio for car loans. It's also important for them to have good credit scores. But not everyone falls into these categories.
1803 Capital can lend a hand to those struggling to qualify for car loans elsewhere. Contact us at (866) 890-2415 now for assistance!
