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Debt-to-Income Ratio for Car Loans: What You Need to Know

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Your debt-to-income ratio is a percentage that represents your monthly debt payments compared to your gross monthly income. Auto lenders use this ratio, also known as DTI, to judge whether you can afford a loan payment. Whether you have a good debt-to-income ratio for a car loan depends on the lender but — generally — the lower, the better.

What is a debt-to-income ratio?

The concept of a debt-to-income ratio is simple: monthly debt divided by monthly income. But there are two kinds of DTI ratios. Auto lenders will look at your back-end DTI, but we’ll explain both:

    • Front-end DTI only accounts for monthly housing costs, including rent or mortgage, homeowners association fees, insurance and taxes. It doesn’t take into account other expenditures, such as payments on auto loans, student loans, personal loans or credit cards.
    • Back-end DTI accounts for all your monthly debt payments. This could include other auto loans, alimony or child support, but it doesn’t include everyday expenses such as groceries or utilities. It also doesn’t include medical bill payments unless a collection agency becomes involved.

Both DTI calculations use gross monthly income rather than net monthly income. Gross income is what you make before taxes or deductions, such as income taxes, Social Security contributions and deductions for health care and retirement. Auto loan applications will generally require you to list your annual income, other sources of income and assets.

Payment-to-income (PTI) ratio: Some auto lenders will instead look at your PTI ratio because it’s simpler to calculate. To determine your PTI, divide your monthly car payment by your gross monthly income. According to the 20/4/10 rule, you should aim to have your transportation costs under 10% of your monthly income.

How to calculate debt-to-income ratio for car loans

Because auto lenders use back-end DTI, we’ll focus on that. To calculate your back-end DTI:

  • Add up your monthly debt payments. If you don’t know what they are, look at your bank and credit card statements to find exact amounts.
  • Look up your monthly gross income. If you’re salaried, you can take the annual amount and divide it by 12. If you’re paid hourly or work freelance, find your total income on your W-2 or 1099 forms and divide by 12 months.

If you don’t have these forms available, look closely at your pay stubs and add up your gross income for one month’s worth of work. If you have fluctuating income and/or you have income from other sources, you could reference:

  • 1099 or W-2 tax forms.
  • Three to six months’ worth of bank statements showing steady deposits.
  • Court orders for child support or alimony.
  • Statements for Social Security benefits or a pension.
  • Official income statements from investment accounts.

Once you have correct numbers for your total monthly debt payments and gross monthly income, divide your debt by your income.

DTI formula
Sum of monthly debt payments / sum of gross monthly income. (See an example, below.)

Debt expenses
Rent $900
Student loan payment $300
Credit card payment $125
Salary $4,000
Part-time hourly work $800

The back-end DTI here is 0.276 — or 28%

What is a good debt-to-income ratio?

Lenders prefer to see DTI ratios below 36%, but there’s wiggle room.

Here’s a deeper dive:

    • DTI of 0% to 35%: Your debt looks manageable. If your DTI is toward the higher end of this range, there are tips and tricks to pay down debt.
    • DTI of 36 to 49%: Your debt management is adequate, but it could be causing you issues. You could consider credit counseling. Nonprofits such as the National Foundation for Credit Counseling (NFCC) offer no- or low-cost solutions.
    • DTI of 50% or more: Strongly consider credit counseling and look into debt relief options.
Does your DTI affect your credit score?

No, your DTI doesn’t affect your credit score, but what’s on your credit report affects your DTI. Lenders and creditors report your payments, which are used to calculate your DTI, to the credit bureaus.

How to improve your DTI

To improve your DTI, you could:

  • Pay down your debts.
  • Increase your income.
  • Do both.

There are many ways to pay down debts, including the snowball method. This involves paying off the debt with the smallest balance, then taking the amount you were putting toward that debt on the next biggest balance – and so on and so on.

Another way to better your DTI ratio is to decrease your housing cost. Maybe a roommate or a smaller apartment would help you meet your goals.

To increase your income, you could make money with your car. There are potential opportunities for both passive and active earnings. You could also consider a side job.

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