How Your Car Loan Affects Your Debt-to-Income Ratio

What a debt-to-income ratio is and why lenders care about it

Your debt-to-income ratio is the percentage of your gross monthly income that goes toward debt payments. Lenders use it to decide whether to lend you money and how much. A car loan is one of the debts that counts toward this number.

If you earn $4,000 a month before taxes and your total monthly debt payments are $1,000, your debt-to-income ratio is 25 percent. That $1,000 includes your car payment, credit card minimums, student loan payments, mortgage or rent (if the lender counts it), and any other regular debt obligations.

Most lenders want to see a ratio below 43 percent before they will lend you money for a car, a home, or other major purchase. Some will go higher if you have a strong credit history, but 43 percent is the common threshold. The lower your ratio, the more attractive you look as a borrower.

Key Takeaways

• Your debt-to-income ratio includes your car payment along with all other monthly debt payments, divided by your gross monthly income.
• Most lenders will not approve a car loan if your ratio would rise above 43 percent, though some lenders have different thresholds.
• A car payment of $400 to $600 per month is typical, but the exact amount depends on the loan term, interest rate, and vehicle price.
• You can lower your ratio by paying down existing debt, increasing your income, or choosing a less expensive vehicle with a smaller monthly payment.
• Your ratio matters most when you are applying for a mortgage, because mortgage lenders scrutinize it more closely than auto lenders do.

How to calculate your debt-to-income ratio with a car loan

Start with your gross monthly income — the money you earn before taxes and deductions. Include salary, wages, self-employment income, and any regular income you can document. Do not include tax refunds or one-time bonuses.

Add up all your monthly debt payments. This includes your car payment, minimum credit card payments, student loan payments, personal loan payments, and any other regular debt obligation. If you are applying for a mortgage, the lender will also count your projected mortgage payment.

Divide your total monthly debt payments by your gross monthly income, then multiply by 100 to get a percentage. For example: if your gross income is $5,000 and your total debt payments are $1,800, your ratio is 36 percent ($1,800 ÷ $5,000 × 100 = 36).

When you apply for a car loan, the lender will add your new car payment to your existing debts and recalculate. If adding the car payment would push you over their threshold, they may deny the loan or offer you a smaller amount.

What counts as debt and what does not

Debt payments that count toward your ratio include car loans, mortgages, student loans, personal loans, credit card minimums, and medical debt payments you have agreed to make. Child support and alimony also count.

Payments that do not count include utilities, insurance, groceries, phone bills, and other regular living expenses. Rent does not count when you are applying for a car loan, though mortgage lenders will include a projected mortgage payment in the calculation.

Credit card debt is tricky. If you carry a balance, lenders count the minimum monthly payment, not the full balance. If you have a $5,000 credit card balance with a minimum payment of $150, only the $150 counts toward your ratio — but that $5,000 still shows up on your credit report and affects your credit score.

How a car loan affects your ratio before and after approval

Before you apply, your ratio is based on your current debts. When you submit a car loan application, the lender calculates what your ratio would be if they approved the loan. They estimate your monthly payment based on the loan amount, interest rate, and term (usually 36 to 72 months).

A $25,000 car loan at 6 percent interest over 60 months costs roughly $483 per month. A $35,000 loan at the same rate costs roughly $677 per month. The exact amount depends on the interest rate you may have access to for, which depends on your credit score and the lender's terms.

If the lender approves you, your ratio goes up by the amount of your new car payment. If you were at 30 percent before the loan, you might be at 38 percent after. This matters most if you are planning to apply for a mortgage soon — mortgage lenders will see the new car payment and may reduce the amount they will lend you.

When your ratio is too high to get approved

If your ratio is already above 43 percent or would be after adding a car payment, most traditional lenders will turn you down. Some credit unions and online lenders have higher thresholds or different criteria, but they are less common.

If you are denied, you have a few options. You can pay down existing debt before applying again — even paying off a credit card or small personal loan can lower your ratio enough to may have access to. You can also choose a less expensive vehicle with a smaller monthly payment, or look for a co-signer with a lower ratio who is willing to take on the loan with you.

Some lenders will approve a loan with a higher ratio if you make a larger down payment, because that reduces the amount you need to borrow and therefore your monthly payment. Putting down 20 percent instead of 10 percent can make a real difference.

Why your ratio matters more for mortgages than car loans

Auto lenders focus heavily on your credit score and whether you can afford the specific car payment. They are less strict about your overall debt-to-income ratio because the car itself serves as collateral — if you stop paying, they can repossess it.

Mortgage lenders, by contrast, scrutinize your ratio closely. A mortgage is a much larger loan, and the lender wants confidence that you can handle all your debts plus a mortgage payment. If you are planning to buy a home in the next year or two, be cautious about taking on a large car loan, because it will reduce the amount a mortgage lender will approve.

If you are in this situation, consider whether you can delay the car purchase, buy a less expensive vehicle, or pay off other debts first. A mortgage approval often depends on keeping your ratio below 43 percent, and a $500 car payment can be the difference between approval and denial.

Steps to improve your ratio before applying for a car loan

The fastest way to lower your ratio is to pay off small debts. Paying off a $150 credit card minimum or a $100 personal loan payment removes that amount from your calculation immediately. Even one paid-off account can move you from denied to approved.

If you have the cash, paying down credit card balances also helps, because it lowers the minimum payment the lender counts. Paying a $5,000 balance down to $2,000 might reduce your minimum payment from $150 to $75.

You can also increase your income on paper by including income you can document but have not yet reported. If you have a side job, rental income, or spousal income you have not included, gather the documentation and add it to your application. The lender will verify it, but it counts toward your gross income.

Finally, if you have time, wait. Every month you make on-time payments and pay down debt improves your ratio. If you are close to may have access to, waiting three to six months while you pay down balances can be enough to get approved.

Frequently Asked Questions

What is a good debt-to-income ratio?

Below 36 percent is considered good by most lenders. Between 36 and 43 percent is acceptable for many loans, though some lenders will not go that high. Above 43 percent makes it hard to get approved for most types of credit. The lower your ratio, the more options you have.

Does my car payment count if I lease instead of buy?

Yes. A lease payment counts toward your debt-to-income ratio the same way a car loan payment does. Lenders treat it as a monthly obligation you have committed to.

Can I lower my ratio by paying off my car loan early?

Yes, but only after you have paid it off completely. Once the loan is gone, that payment no longer counts. Paying extra toward the principal does not lower your ratio until the loan is fully paid — the lender still counts the full monthly payment amount until the account is closed.

What if I have irregular income or am self-employed?

Lenders typically average your income over the past two years for self-employed borrowers or those with irregular income. Bring tax returns, profit-and-loss statements, and bank statements to show your actual earnings. A lower average income means a higher ratio, so document everything you can.

Does my spouse's debt count if we file taxes separately?

It depends on the lender and whether you are applying jointly. If you apply alone, only your debts count. If you apply jointly, both of your debts count and both of your incomes count. Applying separately can help if one spouse has a much higher ratio, but you will need to may have access to on your own income alone.