If you're preparing to apply for auto financing, you need to consider more than just your credit score or the vehicle price. One of the most important factors lenders look at is your debt-to-income (DTI) ratio, a metric that helps them determine whether you can afford additional monthly payments.

So, what is your debt-to-income ratio, and how is it used for auto financing? Let’s break it down.

Determining how much income your debt requires

Your DTI ratio compares your total monthly debt payments to your gross monthly income (what you earn before taxes and deductions). To calculate your DTI, add up your monthly debt payments, then divide that number by your gross monthly income, and multiply the result by 100.

For example, if you have $2,000 of total monthly debts and a gross income of $6,000, your DTI is 33% [(2,000 ÷ 6,000) × 100]. This figure means one-third of the income earned is already going toward paying down existing debt.

What you should include in your DTI calculation:

• Rent or mortgage

• Property taxes and insurance

• Auto financing or leases

• Student loans

• Credit card minimum payments

• Personal loans and co-signed loans

• Court-ordered payments, like child support or alimony

What you can exclude from your DTI calculation:

• Utilities (water, electric, phone, internet)

• Insurance premiums (unless part of a loan)

• Groceries, gas, and discretionary expenses

• Retirement savings or investments

• Any expenses covered by someone else (with proper documentation)

How auto lenders use your DTI

When applying for auto financing, lenders will assess your DTI ratio to determine whether you can take on a new monthly payment. A lower DTI indicates less financial strain, which can increase your approval chances and qualify you for lower interest rates or a larger financed amount.

Most auto lenders prefer a DTI below 36%. In some cases, lenders may approve applications with DTIs up to 50%, but those are exceptions rather than the norm.

Why your DTI matters

A high DTI can lead to higher interest rates, a capped borrowing limit, or even a denial of credit, especially if your credit score is already on the lower side.

If your DTI is too high, you might want to consider:

• Paying down existing debt before applying

• Increasing your income, if possible

• Choosing a less expensive vehicle

• Making a larger down payment to lower the amount borrowed

Concerned about your debt load?

At Credit Acceptance, we believe everyone should have access to reliable transportation. It’s something we share with the over 15,000 dealers in our network. If you’re curious to see the maximum monthly payment you may be approved for, get pre-qualified through our website today!