What's a Debt to Income Ratio?

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Even with poor credit.

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - December 19, 2018

Your debt to income ratio (DTI) lets a lender see how much of your monthly income is needed for your monthly bills. When an auto loan lender computes your DTI to qualify you, their calculations include an estimate for your car payment and auto insurance.

What DTI Means to Lenders

Lenders want to make sure that you can comfortably afford to take on the additional payment for a car loan, which is why they rely on calculations like the DTI ratio. Typically, lenders don't approve people for a loan – especially those with bad credit – if their DTI is higher than 50 percent.

Keeping your monthly bills at or below 50 percent of your pre-tax income allows you to have enough income left over for other necessities. Believe it or not, lenders don't want you to go broke trying to pay for your auto loan. This is even truer for people who are already struggling with poor credit or income challenges.

If you're in a situation like this, you probably need to work with a subprime lender. These lenders have the ability to look beyond your credit and approve you for a loan based on things like income, employment, and residence stability. Subprime auto lenders have these requirements – such as a DTI of 50 percent or lower – in order to make sure that if you qualify for a loan, you won’t struggle to repay it.

How to Calculate Your DTI for a Car Loan

It's a good idea to create a budget before buying a vehicle. One thing you need to do as part of the process is to calculate your DTI. To do this, add up all your monthly bills, including an estimated car and insurance payment, and divide the total by your gross (pre-tax) monthly income. The resulting number, in this case a percentage, is your DTI.

Let’s look at an example where you make $2,400 a month and the combination of your monthly bills, including the estimated car loan and auto insurance payment is $880. Do the math: 880 divided by 2400 equals 0.36 or 36 percent. In this example, this borrower has a DTI of 36 percent, which is below the 50 percent ceiling of most subprime lenders.

If the number you get is greater than 0.50, then your debt to income ratio is too high, and you may not qualify for a car loan. However, DTI is just one piece of the auto financing puzzle.

Other Factors Involved in an Auto Loan

Besides DTI, lenders also look at factors like the payment to income ratio, your credit score, and their own specific additional requirements. The additional requirements vary by lender, but typically include:

  • A minimum gross monthly income of $1,500 to $2,000 from a single employer
  • A minimum of six months at your current job, and at least three years of steady employment with no major gaps between jobs
  • A minimum down payment of $1,000 or 10 percent of the vehicle's selling price, whichever is less
  • A valid driver's license

The Bottom Line

When you need to buy a car with bad credit, you should be prepared for all the expenses involved. Remember, if your current bills require more than half your income, your chances of getting approved for a loan are lower, mainly because this means you could struggle trying to make the monthly payment plus fuel and repair costs. If, however, you've done the math and know you're ready to take out an auto loan, let CarsDirect help.

We work with a coast-to-coast network of special finance dealerships that have the lending resources available to help people in many different credit situations. You can even begin your car buying research by visiting our new and used car pages. Then, fill out our free, fast, and no-obligation auto loan request form and we'll get to work matching you with a local dealer!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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