Are you ready to hit the road in a new car, but your bank account is saying, “Not so fast”? If you have a high debt-to-income (DTI) ratio, getting approved for a car loan will be more of a challenge. Lenders are ideally looking for a below 36% DTI for car loan . If it’s higher than this, it means you’ve already taken on a lot of debt, and that raises red flags. Read on to navigate the tricky road of securing an auto loan with a high debt-to-income ratio.
What is a debt-to-income ratio?
Your debt-to-income ratio is a simple calculation that compares how much money you owe each month to how much money you make. Essentially, it’s a way to measure how much of your income goes toward paying off debts like credit card bills, student loans, or a mortgage. A high DTI ratio means that you’re spending a large portion of your income on debt payments, which can make it harder to get approved for loans. Lenders use your DTI ratio to determine whether you have enough income to comfortably manage new debt, like a loan. The lower your DTI ratio, the better your chances of getting approved for a loan.
What to know about debt-to-income ratio for car loans
When it comes to getting a car loan specifically, lenders want to make sure you have enough income to cover your existing debts as well as the new car loan payments. A high DTI ratio could indicate that you’re already struggling to make your current debt payments, which could make it riskier for the lender to give you another loan.
The good news is that different lenders may have different requirements for DTI ratios therefore, shopping around and comparing offers from different lenders can help you find one that is more willing to work with your specific DTI ratio For example, you could try to pay off some of your existing debts or find ways to increase your income.
How to calculate your debt-to-income ratio
The debt-to-income (DTI) ratio is a straightforward concept, calculated by dividing your monthly debt payments by your monthly income. It’s important to note that there are two types of DTI ratios lenders may consider when evaluating your loan application.
Auto lenders typically use the back-end DTI ratio. The back-end DTI takes into account all of your monthly debt payments, including your potential car loan payment, as well as other debts such as credit cards, student loans, and mortgages. This ratio is calculated by dividing your total monthly debt payments by your gross monthly income.
The back-end DTI is important because it provides a more comprehensive picture of your overall debt burden and your ability to make loan payments on time. Lenders prefer borrowers with lower back-end DTI ratios because it suggests they have more disposable income available to make additional loan payments.
The front-end DTI ratio only considers your monthly housing costs, such as rent or mortgage payments, insurance, taxes, and homeowners association fees. It doesn’t factor in other expenses like utilities or personal loans.
Both DTI ratios use gross monthly income, which is your income before taxes or deductions, such as contributions to Social Security or healthcare and retirement plans.
To better understand the debt-to-income (DTI) ratio, let’s consider an example. Imagine a person with an $800 rent payment, $200 student loan payment, and $400 in credit card debt. If this person earns a monthly gross income of $3,000, their total monthly debt payments would be $1,400. To calculate their DTI ratio, you would divide their monthly debt payments by their monthly gross income:
$1,400 (total monthly debt payments) ÷ $3,000 (monthly gross income) = 0.4667 or 46.67% DTI ratio.
What is considered a high debt-to-income?
A high debt-to-income (DTI) ratio for an auto loan can vary depending on the lender’s criteria and the borrower’s overall financial situation. As a general rule, a DTI ratio of 43% or higher is often considered high for an auto loan application.
A DTI ratio of 43% or higher means that nearly half of the borrower’s gross monthly income is going toward paying off debts, which can be seen as a higher financial risk to lenders. In comparison, a DTI ratio of 36% or lower is typically viewed as more favorable.
Lenders evaluating auto loan applications may consider other factors in addition to the DTI, such as credit score, employment history, and down payment amount. A high DTI ratio does not necessarily mean that a borrower will be denied a car loan, but it could result in higher interest rates or other less favorable loan terms.
Tips for getting a car loan with a high debt-to-income ratio
If you are trying to obtain a car loan with a high debt-to-income ratio, there are several steps you can take to increase your chances of being approved.
Make a larger down payment
One of the best tips is to make a larger down payment when applying for an auto loan. A large down payment can show lenders that you are serious about the loan and have made an effort to save money for it. Putting down more money upfront can help lower your monthly payments, making it more likely that you will be able to repay the loan on time. A smaller loan is also viewed as less of a risk to lenders.
Obtain a co-signer
Another tip is to seek out a co-signer when applying for a loan. A co-signer is someone who agrees to pay back the loan if you’re unable to do so yourself. Having someone responsible with a high credit score serve as your co-signer provides some added assurance to the lender. If you default, there’s someone available to step up and take over payments.
Work toward improving your credit score
Work toward improving your credit score before applying for vehicle financing. Good credit scores indicate financial stability and honesty, making lenders feel more comfortable about offering you a car loan. Make sure that all bills and outstanding debts are paid off on time each month, and avoid taking out too many new lines of credit or loans at once — these actions help build a good credit history, which will make it easier for lenders to approve applications with high debt-to-income ratios.
Find ways to boost your monthly income
If you have a high DTI and need a car, boosting your income is one way to lower that ratio. A higher income will automatically lower the ratio, even if your debt stays exactly the same.
By earning more money each month, you can also use that extra income to pay down your debts, which will lower your monthly debt payments and improve your DTI even more.
Some suggestions for boosting your monthly income are:
- Find a part-time job: If you have some free time, consider finding a part-time job to earn extra income. This could be anything from working at a retail store to delivering food or driving for a rideshare service.
- Freelance or start a side hustle: If you have a skill or hobby that you’re passionate about, consider turning it into a side business. Freelancing or starting a side hustle can help you earn extra income on your own schedule.
- Ask for a raise or promotion: If you’re employed, consider asking for a raise or promotion. If you can demonstrate that you’re a valuable employee who contributes to the company’s success, your employer may be willing to increase your salary or give you a higher-paying role.
- Sell items you no longer need: Take a look around your home and see whether there are any items you no longer need that could be sold for extra income. This could be anything from clothing and electronics to furniture and home decor.
Works toward paying down debt
Paying down debt is essential to getting a car loan with a high DTI ratio. Paying off small debts first can give you quick wins that will provide motivation for tackling larger debts. You should also consider consolidating multiple debts into one payment as this can make it easier to manage your bills.
Practice patience
Having patience is key. Potential lenders need assurance that you’ll be able to make payments in a timely manner, so take the necessary steps to show them that you’re capable of doing so. Lenders may want more detailed information such as recent credit reports and proof of income, so make sure to provide them with accurate facts and information to support your case.
Practicing patience can help you qualify for a better interest rate on loans, potentially saving you money over the life of the loan.
Always Borrow Responsibly
Whether it’s increasing your income, finding a co-signer, or paying down your debt to lower your DTI, taking proactive steps can help you get behind the wheel of the car you want or need. There are plenty of lenders out there each with different DTI requirements and lending criteria. But if you have a higher-than-desirable DTI, it could be in your best interest to work on lowering your debt-to-income ratio for auto loans.
FAQ
Can I get an auto loan if I have a high debt-to-income ratio?
It may be possible to get an auto loan with a high DTI ratio depending on the lender’s criteria. Generally, lenders prefer borrowers with a lower debt-to-income ratio and will look at other factors such as credit score, income, the price of the car, the amount you’re trying to finance, and employment history.
What is the maximum debt-to-income ratio for a car loan?
The maximum debt-to-income ratio for a car loan can vary, but generally a DTI ratio of 43% or lower is considered favorable.
Does your debt-to-income ratio affect buying a car?
Yes, your debt-to-income ratio can play a significant role when applying for an auto loan. Lenders will use your DTI to evaluate your ability to repay the loans you take out. Factors such as the amount of existing debt you hold compared to your total income will be taken into consideration to determine whether you are able to meet the financial commitments associated with purchasing a car.
Written by Jeannine Mancini Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies and a Master of Arts in Career and Technical Education from the University of Central Florida.
