Your debt to income (DTI) ratio is your monthly income compared to your monthly obligations. When you’re applying for an auto loan, your DTI ratio is an important indicator of your ability to comfortably afford the car payments.
Max DTI Ratio for an Auto Loan
As a general rule, auto lenders cap your DTI ratio to 45% to 50%. This means that with the projected car payment and auto insurance payment that you’re applying for factored in, at least half of your income should be still available.
Even if you make decent money each month, lenders want to know how much of that income is going to feasibly be available to afford the car payment. If you make $2,000 of income a month but your credit card payments, rent, and student loan payments are $1,500 a month, that means your DTI ratio is already at 75%. If you factor in a car loan payment and insurance premium, it’s likely to push your budget to the max – which an auto lender wants to avoid doing.
A high DTI ratio can be risky for you because if you do get approved for a car loan and you don’t have much wiggle room in your monthly budget, it could lead to missed payments on the car loan if unexpected expenses crop up.
When it comes to the DTI ratio, the lower it is, the better. Ideally, you want your DTI ratio to be under 45% with the projected car payment and insurance premium included. The more income you have available, the higher your odds are for meeting a lender's requirements.
What About Income Requirements?
How much income you bring in each month is also just as important as your DTI ratio.
If you have poor credit and you’re working with a subprime lender, expect them to require around $1,500 to $2,000 of gross monthly income to be eligible for a car loan. Keep in mind that lenders look at your income pre-tax – so when applying for an auto loan, be sure to list your gross income and not your net.
Auto lenders typically require you to meet their income requirements with a single income source. However, your DTI ratio does usually include all your additional income sources. If you have other sources of income outside of your regular job, be sure to list them, because it could help you lower your DTI ratio.
Looking for Auto Loan Connections?
At Auto Credit Express, we’ve created a nationwide network of special finance dealerships. These dealers are signed up with subprime lenders that assist with many credit challenges, including no credit, bad credit, and even bankruptcy. If you’re not sure where to find your next auto loan and need the assistance of subprime lenders, then complete our free auto loan request form. We’ll look for a dealership in your local area!