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If you want to refinance your auto loan to change your terms or monthly payment, your debt-to-income ratio matters. A debt-to-income ratio, or DTI, is your monthly debt compared to your gross monthly income. This ratio shows lenders how much of your income is tied up in debt payments. A lower DTI shows you have extra income for saving or a new loan, while a high DTI can indicate that you don’t have much wiggle room.
Improving your DTI ratio for a car loan can help you get a better deal when you’re considering refinancing.
Whenever you borrow money, your lender will want to know your debt-to-income ratio (DTI). This number tells them how much debt you have compared to the money you’re bringing in. Lenders use DTI when determining whether someone can qualify for any new loan, whether it’s a mortgage, personal loan or auto loan. They use your debt to income ratio for refinance decisions, too, since they also require you to have enough room in your budget to afford the new payments.
An auto loan refinancing pre-approval is a quick way to find out if your income and current debts are within the acceptable range for a particular lender.
The best debt to income ratio for a refinance is anywhere between 0 and 36%. If your DTI falls within that range, it shows that you have a manageable amount of debt. You’ll find it easier to qualify for an auto refinance if you can keep your DTI within that range (the lower the better).
A DTI of 36% to 49% could indicate that your debts are starting to seriously eat into your monthly income. Lenders may be more wary of lending to you. If your debt to income for a car loan is 50% or higher, most lenders will consider you maxed out in terms of being able to take on additional debt and will likely decline a loan.
However, if your DTI is on the higher side, you may be able to make up for it through other factors, like having an excellent credit score or putting down a big down payment.
It’s okay if you don’t know what your DTI is. You can calculate your debt-to-income yourself using a simple formula: monthly debt divided by gross monthly income. Here’s how to do it.
For example, if you have a $2,000 mortgage payment and a $500 student loan payment, your monthly debt is $2,500. Suppose you earn $6,000 per month (pre-tax). Your calculation would look like this:
Rounding up, your DTI would be 42%. While it’s a little on the high side, different lenders have different DTI limits. You may qualify for a loan, although the lender could charge a higher interest rate to make up for the higher risk. Adding a co-borrower with strong credit might help.
Your debt-to-income ratio is an important indicator for lenders when deciding whether to offer you a loan, for how much and at what rate. You can improve your debt-to-income ratio for a refinance and boost your odds of approval by increasing your income, lowering your debt or both. Here are some concrete ways to do that, starting today.
Lowering your debt balance will improve your DTI. Apply any extra funds toward your credit card and loan balances. Consider paying off small balances in full, then focus your efforts on high-interest debt for the most effective approach.
Take a look at your budget to find a few big-impact places to cut costs, such as eliminating subscriptions or shopping for a better deal on utilities. It may be worth temporarily cutting back in some areas, like dining out, to free up cash to make a significant dent in your debt. Once you’ve lowered your DTI and refinanced your auto loan, you can reintroduce those little luxuries.
Taking on additional debt will increase your DTI, which isn’t what you want. In fact, that’s why many people refinance their car before buying a house: changing to a lower monthly payment lowers their DTI. When you have a new loan in your sights, avoid borrowing any other money until the loan is in place.
If you haven’t pushed yourself at work lately, now is the time. Make the case for a raise or even apply for a higher paying role. You could also pick up overtime, extra shifts or a side hustle to bring in more cash, which increases your income and lowers your DTI ratio for a car loan.
Refinancing your auto loan is a great way to lower your monthly payment or pay less interest overall. RefiJet offers tools to help you find the best auto refinance loan. Get started today to be pre-approved, compare offers from multiple lenders and find your best offer.
Below are a few of the most commonly asked questions about debt to income for a car loan.
Your debt-to-income ratio is the sum of your monthly debts divided by your gross monthly income. It shows what proportion of your money goes to debt payments each month, indicating how much income you have available to cover new debt.
The ideal debt to income ratio for refinancing an auto loan is 36% or below, but you may be able to refinance with a higher debt-to-income ratio than that. A DTI in the range of 36% to 49% is less desirable, but lenders still consider other factors like credit score and down payment amount.
You can lower your debt or increase your income to improve your DTI ratio for a car loan. To lower debt, work on applying any extra cash to high-interest credit card debt or loans. Making temporary cuts to your budget can free up money to pay off some of your debt.
Yes, your current car loan figures into your debt-to-income ratio as it is one of the debts you’re responsible for each month.
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