What’s the Ideal Debt-to-Income Ratio for a Car Loan?

Sure — a good credit score is important when you’re applying for an auto loan, but what about the debt-to-income ratio? It’s just as — if not more — important. If you’re paying a significant amount of money in debts every month, you could up straining yourself financially if you throw a car loan into the mix. Learn more about the ideal debt-to-income ratio for car loans and how to calculate yours below!

What is the Debt-to-Income Ratio?

Debt-to-income, or DTI, ratio compares your monthly debt payments to your monthly gross income — or how much you make before taxes and other deductions. DTI ratio is the percentage of your monthly gross income that you use to make payments on debts, such as personal loans and credit cards.

How to Calculate Your DTI

You can calculate your debt-to-income ratio in just three steps. Here’s how:

• Step 1: Total the amounts you put toward mortgage payments, loans, and credit cards.
• Step 2: Divide your total monthly debt payment amount by your monthly gross income.
• Step 3: You’ll get a decimal. Multiply that decimal by 100 to get your DTI percentage.

DTI Ratio for Auto Loans

Naturally, the lower your DTI percentage, the better. If you’re applying for an auto loan, lenders typically want to see a DTI of no more than 36 percent of your monthly gross income. For example, if you make around $2,500 a month, you may be denied a car loan if your monthly debt payments total more than $900; a consistently high debt-to-income ratio stands out to lenders as a habitual bad credit factor.

How to Lower the Ratio

Does the car you want push your DTI beyond 36 percent? You can choose a less expensive car, thereby lowering the amount you’ll pay every month and giving you wiggle room on your DTI. You can also sell or trade-in your current car, and put the cash you make from the sale toward the value of the car you want. Consider lengthening the loan term as well, but make sure you don’t end up owning more than what the car’s worth, so if you decide to sell in the future, you can make a profit.

You can also consider applying for a car loan with a cosigner, as their income, debt-to-income ratio, and credit score will help improve your chances of getting approved. Learn more about how to find a cosigner!

Get More Information from Green Light Audio Credit

If your debt-to-income ratio is higher than 36 percent, we can answer your auto financing questions and give you more suggestions for lowering the ratio. Contact us to learn more about our financing solutions for applicants with good, bad, or no credit, or to get answers to your questions about APR vs. interest rates!

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