What Is a Debt to Income Ratio, and How Can I Improve It?

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


, - November 12, 2019

Your debt to income (DTI) ratio refers to the percentage of your total monthly income that’s dedicated to your regular monthly bills. A lender is going to debt you out and determine your ratio when reviewing your car loan application. In order to get a bad credit auto loan, you typically need to have a DTI ratio that’s less than 45% to 50%.

Why Is the Debt to Income Ratio Important?

Before we get into how to improve your DTI ratio, you should know why it’s important. Lenders debt you out to make sure you can comfortably afford an auto loan, and set limits on how much debt you’re allowed to have.

Believe it or not, lenders want to see you successfully complete a car loan, and calculating your DTI ratio helps the lender feel confident in your ability to pay it off. Plus, it helps you determine your budget, so you should calculate it at home beforehand to be more prepared.

Just how much debt you’re allowed to have varies by lender. However, most bad credit lenders generally cap the maximum allowed DTI ratio at 45% to 50%. The lower the percentage, the better off you are.

How Can I Improve My DTI Ratio?

OK, so you now know what a DTI ratio is, but how do you calculate and improve it? Determining your DTI ratio is easy. All you have to do is add up all your regular monthly bills plus an estimated auto loan and insurance payment, and divide the total by your pre-tax monthly income.

So, for example, if you make $1,900 a month before taxes, and your monthly bills plus an estimated car and insurance payment all add up to $750, your DTI ratio would be 40%.

If you calculate your DTI ratio, and the percentage is closer to or above 50%, the best way to improve your DTI ratio is to pay down as much debt as you can. Amounts owed makes up 30% of your FICO credit score (the most common scoring model used by subprime lenders), and although you may be paying your bills on time each month, the debt remaining could be bringing your credit score down and affecting your DTI ratio.

A common issue consumers are faced with is credit card debt. It’s easy to fall into, and it can greatly affect your DTI ratio and credit score. If you have high credit card balances, you should work to pay off these or reduce the debt owed as best you can. The less you owe, the lower your DTI ratio is going to be, and the better your chances are of getting approved for a bad credit auto loan.

Struggling with Credit and Need a Car? We Can Help

If you’ve taken the proactive step of lowering your amounts owed and reduced your DTI ratio to a good percentage, where do you go to find a bad credit car loan? You could go from dealer to dealer looking for an approval, but we want to point you in the direction of the right one the first time.

At CarsDirect, we work with a nationwide network of dealerships that specialize in helping consumers find the financing they need. All you need to do is fill out our auto loan request form to get started, and we’ll do the searching for you!

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


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