Yes, auto lenders do care about your other debts and obligations. They factor it into your debt to income ratio, which has a say in whether or not you have enough income to repay a loan and vehicle expenses in tandem with your other monthly debt payments.
What Kind of Debt Do Auto Lenders Consider?
When you apply for a car loan, the lender takes a look at your situation, income, and credit reports. Most bad credit auto lenders require that you have around $1,500 to $2,500 of monthly income (before taxes), but their credit score requirements can vary.
Something that all lenders require is that you have enough income to repay the car loan while still keeping up with your other monthly payments. Your debt to income (DTI) ratio is a calculation that shows lenders how much of your income is being used by the bills you pay. Your monthly gross income is divided by your monthly debt payments. If less than 45% to 50% of your monthly income is going to be taken up with your projected car payment and other debts, then you’re on the right track to get approved for a car loan, income-wise.
Debts and monthly bills that auto lenders typically consider include:
- Rent or mortgage payments
- Insurance premiums
- Active auto loans
- Credit card minimum monthly payments
- Student debt payments
- Alimony or child support payments
Utilities, on the other hand, aren’t included. So things like groceries, electric bill, and water bill aren’t added to your DTI ratio calculation.
Does the Number of Debts Matter?
How many active credit lines you have doesn’t typically matter as much to your DTI ratio, since the amount you have to pay each month is what’s factored in. Say you have five credit cards, but their balances are all very low. This could be seen as you successfully managing multiple credit lines and bode well for you.
In fact, having multiple active credit lines is good for your credit score, as long as they’re being managed and you can comfortably afford them all.
However, if you have high balances on your other monthly obligations and high monthly payments, it could push your DTI ratio out of balance.
Lowering Your DTI Ratio
If you already have a lot of monthly payments and are worried about meeting an auto lender’s requirements, then here are some tips.
- Pay down your credit cards before applying – If you have high credit card debt, try paying it down as much as possible. Not only does having revolving credit accounts with balances higher than 30% of their spending limits harm your credit score, but paying down your balances proves you can handle credit. If your credit cards have a zero balance, then you don’t have a minimum payment to make each month – which improves your DTI ratio!
- Have additional income? Include it – While most auto lenders only accept one source of income to meet income requirements, additional income from other jobs or unearned income, such as Social Security, can typically be used to lower your DTI ratio. Include all of your income sources on a car loan application.
- Consider a co-borrower – If you have a spouse or life partner, you may be able to include them in the auto loan application as a co-borrower. Co-borrowers combine their incomes to meet income requirements and share responsibility for the auto loan and vehicle together.
Having too much debt you have to pay each month can influence your approval odds for a car loan. Paying down your monthly obligations is one of the better ways to improve your DTI ratio, or adding other income to the auto loan application.
Looking for Car Loan Connections?
While having enough income and a low enough DTI ratio are all great, your credit score matters, too. If your credit score isn’t high enough, it could mean getting turned down for vehicle financing despite having a solid financial situation.
But you may not be out of luck just yet.
Here at Auto Credit Express, we’ve created a coast-to-coast network of special finance dealerships that assist borrowers with credit challenges. We’ll look for a dealer in your local area after you complete our free auto loan request form. Don’t let your credit get in the way of your next car loan, and get started with us today!