Debt-To-Income Ratio for a Car Loan: How It Works

• Debt-to-Income Ratio (DTI) compares monthly debt to income, influencing loan eligibility. It includes debts like housing costs and loans (but not living expenses).
• It is calculated by dividing total monthly debt by gross income and multiplying by 100. 
• A lower DTI indicates better financial health and loan eligibility. A high DTI can limit loan options. 
• Reducing debt or increasing income can improve DTI and financial stability.

When you break it down, your debt-to-income ratio juxtaposes your monthly debt and income. This ratio determines how much you spend on debt to reveal what leftover funds are available to cover additional expenses, such as an auto loan. Lenders may also categorize your DTI ratio as “front-end” or “back-end”: 

• Front-end: Your front-end DTI ratio determines how much of your gross (pre-tax) income goes toward housing expenses. Mortgage lenders often rely on this type of DTI ratio for qualifying potential homeowners. 
• Back-end: Basic and back-end DTI ratios express all your debt payments and their relationship to your monthly income. If your monthly debt totaled $1,500 and you earned $2,000 gross, your DTI ratio would be 75%.

Your DTI ratio doesn’t include living expenses such as grocery or utility bills. While your debt-to-income ratio doesn’t impact your credit score, the two are closely related. Higher DTI ratios often indicate you’re using more of your credit, affecting your credit utilization and score. Lenders that see a high debt-to-income ratio often cite it as the cause for denying your loan application.  

Outside of applying for loans or credit cards, DTI ratios can also signify overall financial health. A higher DTI may trigger you to reduce your monthly debt to increase your savings and improve your credit score. Specific DTI ratios can also give you a goalpost to aim for in determining what amount of debt is manageable. 

Calculating your DTI ratio requires looking at your previous month's bank statements and pay stubs. Get a pen and paper handy, and follow the steps below to find your debt-to-income ratio: 

1. Determine your gross income

Write down your gross monthly income before taxes. You may have a main full-time job that brings in income and any side or part-time jobs you do. This includes social security. The main idea here is to understand better what you make monthly, even if it’s a rough estimate. 

2. Total your monthly debts

Your monthly debts can come from several places, including: 

• Housing costs - rent or mortgage payments
• Outstanding credit card payments 
• Monthly loan payments - student loans, personal loans, or auto loans 
• Medical and auto insurance premiums 
• Child support or alimony (if applicable) 
• Streaming services

Remember, food and utilities don’t factor into this number. If you’re unsure about a particular charge, include it just in case. If you overestimate, your DTI ratio will end up lower than you calculated. 

3. Divide and multiply 

Take your total monthly debt payments and divide it by your total monthly gross income. Then, multiply that number by 100 to reveal the percentage. Take the following example to put it all together: 

If you divide $1,000 in monthly debt by $4,500 in income and then multiply that result by 100, you’d get about 22%. Your DTI ratio would be 22%, which is on the lower end of the spectrum. Read on to learn more about what your DTI ratio means in context. 

DTI ratios often contribute to how long you can get a car loan for and even if you can have two car loans simultaneously. The table below summarizes DTI ratios in a lender’s eyes: 

High debt-to-income ratios range from around 40% to above 50%. If you spend more than half of your paycheck on debts, it’s time to reconsider what debts you can reduce or do away with. You can also look into increasing your income to offset your existing debt. 

Improving your debt-to-income ratio can help you pay off a car loan faster and may even gain you valuable preapproval for a car loan. Relying on a strategy remains one of the best ways to improve your DTI. Below are a few ideas to help get you started: 

• Minimize debt by removing unnecessary charges or services 
• Work on paying off existing debts, either from smallest amounts to largest or vice versa
• Establish a side hustle or other form of income, even if it’s only a small contribution 
• Refinance your existing loans for longer terms and lower monthly payments
• Avoid adding more debt, even if it’s only a few dollars per month 
• Consider debt counseling or consolidation 
• Ask for a raise at work or invest in overtime

Similar to your credit score, spending some time improving this ratio has significant consequences for your financial well-being, regardless of what type of loan you’re after. A lower debt-to-income ratio could mean the difference between obtaining a car loan and facing rejection. If you can determine your DTI ratio before submitting preapproval applications, you can also avoid needless credit checks that further jeopardize your chances for approval. 

Getting a car loan with a high DTI ratio is possible under the right circumstances. Many special financing lenders, such as buy-here-pay-here dealerships, may consider borrowers with high DTI ratios. However, you can also get a new loan with a high DTI ratio if you: 

• Make a sizeable down payment to reduce your financed amount
• Improve your credit score to decrease your potential loan risk 
• Present a cosigner with better qualifications
• Boost your income and lower your debt 

Ultimately, it’s best if your debt-to-income ratio works in your favor for any loan. While it may not be enjoyable to work on lowering your debt instead of driving away in your new car, improving your financial circumstances has larger ramifications. Maintaining positive personal finance habits can serve you for the rest of your life.