Get Approved for a Bad Credit Auto Loan with a Good Debt-to-Income Ratio

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Senior Automotive Editor

Christian Gulliksen was the Senior Automotive Editor for CarsDirect. He was formerly a senior editor with Robb Report magazine, and has contributed to publications like Worth, Variety, The Hollywood Reporter and MarketingProfs.com.

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, Senior Automotive Editor - April 15, 2016

CarsDirect Fact: Banks are most likely to approve your bad credit car loan when your debt-to-income (DTI) ratio is below 36%.

Lenders consider a variety of factors when approving your bad credit auto loan. One of the most important is your debt-to-income (DTI) ratio—this compares what you earn to monthly debt obligations like payments for your rent/mortgage, car loan, credit cards and student loans. You stand the best chance of getting approved when your debt-to-income ratio is no more than 36%.

This may seem low, but it's important to note that expenses like groceries, utilities and insurance aren't included in DTI calculations.

Having a good DTI ratio is critical to the approval process—especially when you're rebuilding your credit, living paycheck-to-paycheck, and can't easily handle unexpected expenses. That's why you should do your budgetary homework before you start shopping for a car or loan.

Get pre-approval from a trusted dealer who specializes in bad credit loans »

Simply multiply what you make by .36 to get your maximum ideal DTI ratio. If you earn $4,000 a month, for example, a lender wants to see total debt payments of $1,440 or less. This means the bank is most comfortable with a car payment that doesn't exceed $340 if your rent is $900, your Visa bill is $100, and your student loan is $100.

So, if a $340 payment fits within your 36% DTI ratio and you're requesting a 60-month loan, your realistic budget (including tax, title and license) would be $20,400 plus the value of your trade-in or down payment.

Once you estimate your how much a lender thinks you can afford, you can choose a car that fits comfortably within that budget and improve your chances for getting approved.

Apply today for pre-approval from a trusted dealer who understands your credit situation »

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, Senior Automotive Editor

Christian Gulliksen was the Senior Automotive Editor for CarsDirect. He was formerly a senior editor with Robb Report magazine, and has contributed to publications like Worth, Variety, The Hollywood Reporter and MarketingProfs.com.

Follow On: Google+ | Website

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