A payment to income ratio – or PTI – is a calculation used by lenders to help determine your eligibility to finance a vehicle, either new or used. Your PTI shows the portion of your monthly income taken up by a car payment, and it's a percentage you can use as you're budgeting for your next vehicle.
Why PTI is Key
Believe it or not, lenders are on your side when you finance something major like a car. If you think about it, there's no endgame for a lender that encourages borrowers to take out a loan they can't handle – repossession is just as hard on the lender as it is on the borrower. Lenders want you to take out a loan that you can handle, and that means making sure a monthly car payment fits within your budget.
Think about your total gross (pre-tax) monthly income – a number that represents 100 percent of your budget. Each thing you pay for over the course of a month represents a percentage of your monthly income. Since lenders want your monthly car payment to be affordable, they typically cap a vehicle PTI between 15 and 20 percent of your total monthly income. If your car payment takes up more than that, you run a higher risk of defaulting on your auto loan and having your vehicle repossessed.
Calculating a payment to income ratio isn't an exact science, but it’s a common guideline that's followed by lenders that finance people with poor credit.
Calculating Your PTI
When you're setting your budget, it's easy to find a comfortable payment range for your next vehicle by calculating your PTI. First, take your pre-tax monthly income, and multiple it by 0.15, then repeat the process multiplying by 0.20. The totals represent your high and low monthly payment amounts. Calculating your monthly payment range typically gives you a good goal to reach for when car shopping.
For example: If you had an income of $2,400, this is how you would calculate your PTI range. $2,400 x 0.15 = $360 and $2,400 x 0.20 = $480. So, in this example, a good car payment range would be $360 to $480 per month.
Just Part of the Equation
Knowing your payment range is a great way to begin preparing to buy a car. But computing your PTI is only one part of the equation when you need financing. Because an auto loan is only part of your overall debt, lenders also look at your debt to income (DTI) ratio to ensure that a monthly loan and car insurance payment both fit into your budget. Adding these two payments to your overall monthly bills shouldn't take up more than half of your monthly pre-tax income.
Another factor in financing is your credit score. It determines what type of lender you can use, and is typically the basis for your interest rate. When it comes to credit, the lower your credit score, the higher your interest rate is likely to be.
Knowing where your credit stands is an important step in the car buying process. You should never let a lender determine your credit for you. Knowing your score protects you from getting an unnecessarily high interest rate, and also helps predict what you can expect when you're setting your budget.
Additionally, plan on requesting your credit reports and viewing at least one of your credit scores before you head to the dealership. This gives you a chance to review your reports for accuracy, while having incorrect information removed can help bring up a score that's sagging.
Getting the Right Help
Another way to improve a poor credit score is with a car loan. If you're worried that bad credit is going to stop you from getting the auto financing you need, don't fret. There are special finance dealers all across the country that work with lenders prepared to take on just that challenge. Here at CarsDirect, we know where to look when you're in just this situation.
Our process is free of charge and obligation, so don't hesitate. Simply fill out our easy online auto loan request form, and we'll get right to work matching you with a special finance dealership in your area from our nationwide network. Get started right now!
