When you go to purchase a new car, there are chances that your car loan lender will look for your debt-to-income ratio, apart from your credit score. This is done to determine your ability to repay the amount of the auto loan you are applying for. It is a percentage of your earnings that is set aside for debt repayment. But, what is a good debt-to-income ratio for a car loan?
The ideal debt-to-income ratio for a car loan is considered below 36%. Car loan lenders will definitely approve your car loan if you have a 36% or lower debt-to-income ratio, However, many auto loan lenders approve loans of customers with a 50% debt-to-income ratio. So, when you go for getting a car loan, check your debt-to-income ratio too, along with your credit score.
Let’s get to know more about the debt-to-income ratio for a car loan.
Do they look at debt to income ratio for a car loan?
Yes, apart from credit score, lenders also look into your debt-to-income ratio, as a measure to check if you will be able to repay your auto loan. Moreover, an ideal debt-to-income ratio needs to be less than 36% for getting a good deal auto loan. However, many times lenders approve auto loans for users having a debt-to-income ratio close to 50%.
Apart from debt-to-income ratio and credit score, lenders look into your Employment history. Because lenders value consistency in borrowers’ employment histories.
How much debt to income ratio to buy a car?
It is good to have a debt to income ratio below 36% to buy a car on loan. Lenders find it great and worth of giving a loan to someone having a debt to income ratio of less than 36%. However, even if someone has debt to income at 50%, still they can be eligible for getting a car loan.
But in that case, you need to have a good credit score and employment history.
How to get a car loan with high debt to income ratio?
If you are having a debt to income ratio of more than 40 or 45%, then still you can be eligible for the car loan, as some lenders allow car loans on a debt-income ratio equal to 50%. However, even in this case, you need to have a good credit score and employment history.
On the other hand, if your debt to income ratio is even more than this, then you may have a hard time getting a car loan, as the high debt to income ratio may be a sign of already high debts, and a big part of your monthly income going into paying those debts.
The lenders will not put a hand on your application in that case. So, in that case, you need to approve your debt-to-income ratio.
What is included in debt to income ratio?
The front-end DTI calculation includes the monthly mortgage payment, property taxes, homeowners insurance, and, if applicable, homeowners association dues.
On the other hand, calculating back-end DTI includes costs such as the mortgage and other housing costs, in addition to debts such as auto loans, credit cards, student loans, and child support.
How to calculate debt to income ratio for car loan?
Actually, the debt-to-income ratio is of two types- Front End DTI and Back-End DTI. A good debt-to-income ratio for a car loan needs to be less than 28% for front-end DTI and 36% for back-end DTI.
But how to calculate your debt-to-income ratio? Here is the method:
To calculate your front-end ratio, multiply your monthly housing costs by your monthly gross income, then divide that by 100.
Back-end DTI, on the other hand, includes all of your monthly debt obligations, such as credit card payments, student loan payments (including interest), car payments, and housing (rent or mortgage) payments, as well as child support, alimony, and private loans. Divide this number by twelve using your monthly pre-tax income.
Your current and future financial obligations, such as any future mortgage payments, are all factors considered by a lender when calculating your debt-to-income ratio.
How to lower debt-to-income ratio for car loan?
If you have a debt-to-income ratio of more than 50, then you will get a car loan. So in order to qualify for a car loan, you have to work on your debt-to-income ratio. There are many ways to work on your debt-to-income ratio; let’s have a look:
1) Pay your Debts as fast as you can
You can improve your debt to income ratio by paying off loans and reducing your debt. In order to pay off your debts more quickly, you should reevaluate your spending plan.
It is not considered part of your DTI if you have less than six months left on an installment debt like a student loan.
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2) Avoid getting a new loan
Avoid adding to your debt or making large purchases with a credit card because your DTI ratio will reflect this. Until you buy a new car, you should avoid taking on any large debts.
3) Increase your Income
You should increase your income to achieve an ideal debt-to-income ratio. Increased income not only assists you in achieving the appropriate debt-to-income ratio for a car loan, or mortgage but also assists you in achieving greater financial stability.
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4) Delay until DTI decreases
Debt-to-income ratios of 50% or more may indicate that you should postpone the purchase of a new car. On the other hand, a low debt-to-earnings ratio makes you more appealing to lenders and improves your financial situation.
So until your DTI reduces, focus on debt repayment and drop the idea of purchasing a new car till then.
So now you know what is a good debt-to-income ratio for a car loan. Keep in mind that a below 36% will surely qualify you for a car loan. However, the DTI of more than 36% and less than 50% will also make you qualify but you need to have a good credit score and employment history.
Also, before purchasing the new car, calculate your DTI. We hope this article was helpful & informative. Please leave your valuable thoughts & suggestions in the comments below!
Thank you for reading!