Debt-to-income ratio for car loan eligibility: Everything you need to know
You found the perfect new car, or maybe your old clunker finally died, forcing you into the market. Either way, you need an auto loan to finance the vehicle.
But will lenders approve you?
A lot hinges on an obscure financial metric called debt to income (DTI) ratio, which shows how much of your gross monthly income goes toward debt payments.
Keep reading to learn how the debt-to-income ratio affects auto loan eligibility, what numbers lenders look for, and how to optimize your ratio to boost approval odds.
What is the debt-to-income ratio?
In the simplest terms, the debt-to-income ratio compares your monthly debt payments to your monthly gross income before taxes and deductions.
Lenders use DTI to assess your risk profile and gauge your ability to handle additional debt.
The reasoning behind the ratio is simple: the lower it is, the more income you have left over after making debt payments. This gives lenders confidence you can shoulder a new mortgage, auto loan, or other credit line.
Conversely, a high DTI signals you have less wiggle room in your budget to cover additional financing. You’re stretching income thin across multiple existing debts.
Calculating your debt-to-income ratio
There are two main types of debt-to-income ratios—front-end DTI and back-end DTI.
Front-end DTI is far less common because it only considers your mortgage payment and housing costs when calculating debt obligations.
Back-end DTI is much more holistic and what most lenders focus on; in fact, it is so widely used that it can just be labeled DTI without the front-end or back-end clarification. It encompasses your total monthly debt payments, including:
- Credit cards
- Auto loans
- Student loans
- Personal loans
- Child support
Because it represents your entire debt load, back-end DTI gives the most complete picture of disposable income available to cover new financing. That’s why it's what most lenders look at.
Now, to calculate your DTI, follow these steps:
- List all your monthly debt payments - This includes mortgage, credit cards, student loans, auto loans, personal loans, child support, and any other debt obligations. Add them up to get your total monthly debt payments.
- Determine your monthly gross income - Your gross income is the amount earned before any taxes or deductions. Use annual income if easier and divide by 12 months. For variable income, calculate your monthly average.
- Divide total monthly debt payments by monthly gross income.
Here’s a quick example of a debt-to-income ratio for a car loan:
|Gross monthly income
|Mortgage - $1,500
Car Loan - $400
Credit Card - $200
|$2,100 (debt) / $5,000 (income) = 0.42 or 42% DTI
What lenders look at for debt-to-income ratio car loan eligibility
Your DTI gives auto lenders insight into a crucial question—can you realistically afford loan payments for a new car?
Lenders prefer that your ratio stays under 36%. This shows your income sufficiently covers existing debts with room to spare for an additional monthly car payment.
Conversely, a high DTI of over 50% suggests you have little wiggle room in your budget. Taking on more debt may overextend your finances and cause repayment struggles.
Here’s a basic breakdown of the DTI ranges:
Shoot for at least an acceptable DTI under 49% if you can’t reach under 36%. Ratios over 50% make approval pretty difficult.
How to improve your car loan debt to income ratio
If your score isn’t where you want it to be, the good news is that there are certain steps you can take to reduce your debt-to-income for car loan qualification.
Here are a few tactics to get the best debt-to-income ratio auto loan and satisfy lenders:
- Pay down current debts aggressively
- Increase your gross monthly income
- Refinance existing loans to lower payments
- Consolidate debts through a balance transfer card or personal loan
- Add a cosigner with better income/DTI to strengthen the application
Even marginally lowering your ratio earlier can help you finance that new car. But be sure to make the changes several months before applying so that these have time to factor in.
Debt to income ratio vs. credit scores: what’s the link?
You may be wondering how credit scores fit in with all of this. Although DTI doesn’t directly factor into credit scoring models, the two are interconnected.
Issues like late payments, maxed-out cards, and collection accounts hurt both your credit reports and debt-to-income ratio for car loan calculations.
High credit card balances increase monthly minimum payments owed, raising DTI. Unpaid debts get sent to collections, becoming additional monthly obligations that negatively impact your ratio.
Conversely, diligently paying down balances improves your DTI while also strengthening payment history and lowering credit utilization—both major factors for credit scoring.
So, stay on top of your debt obligations to keep both your auto loan debt-to-income ratio and credit scores in good standing.