I wanted to touch on the topic of Income to Debt Ratio when you are looking to qualify for an auto loan. This is a tool all none prime lenders use in determining your qualification for an auto loan. A debt to income ratio is the balance between your total monthly obligations and your gross monthly income. Basically, the question here when applying for an auto loan is “can you afford to be in an auto loan?” and lenders are looking to see how well you can manage additional debt to your already existing credit obligations with this ratio.
The lower your ratio the better your chances of getting approved. However, the acceptable percentage varies with different lenders. Sub prime lenders for instance have a 45-48% maximum debt to income ration policy. The percentage will dictate the maximum monthly payment on the amount the lenders are willing to loan. Not only is this calculation useful in getting a loan, It tells you where you are at with your finances. It is a means to show when debt is getting out of control. Not only does it give you the opportunity to manage your debt, it also gives you the chance to improve it.
Also, note that your day to day living expenses are not factored in to your debt to income ratio, These are additional expenses monthly.
Debt to Income Ratio Calculator
To calculate your DTI (debt to income), add all your monthly debt payments, include your rent or mortgage, credit cards, car payments, and divide by your total household monthly income. Then multiply this by 100. Below is a screen shot posted by National Post on calculating your DTI
Debt to Income Ratio
If you go over the acceptable percentage of debt to income ratio, you may be asked to put money down or wait til some of your debt has been paid. Paying down your creditors as soon as possible will avoid the high debt to income ratio. Credit cards with the highest interest rates should be paid out as soon as possible. You might want to consider seeking help with resources such as Consumer Proposal or Credit Counselling when you feel your debt is out of control.
These are standard scenarios that may not necessarily apply if one has a high credit rating and some assets, but the best course of action when trying to qualify for an auto loan is to consult with a credit specialist.
My name is Joanne a Credit Specialist. Thank you for stopping by and I hope you found this blog informative. Before you leave, feel free to fill out the form to your right if you are in the market for an auto loan, or you are simply looking for a free consultation.
Hope to meet you soon.