Getting a car loan with a high Debt to Income (DTI) ratio is difficult – but not impossible. Lenders divide your projected payments on all your obligations by your gross income to calculate this fraction.

They shy away from approving applications when the percentage reaches certain thresholds. You are a riskier borrower because your principal and interest outflows already consume such a large percentage of what you earn.

You may have difficulty qualifying to buy an automobile even if you have a good credit history or score. Improve your qualifications by either lowering your monthly expenditures or by increasing the earnings reported on the application.

High Debt to Income Ratio Car Loans – Lower Monthly Payments

The first strategy to improve your chances of getting a car loan with a high debt to income ratio is to reduce what you must repay every month. The monthly payments represent the numerator (top figure) in this critical percentage.

DTI = Monthly Debt Service Payments/Monthly Gross Income

You can lower the top half of this critical equation through debt consolidation, choosing a longer term, debt settlement, or picking a more affordable vehicle.

Debt Consolidation

Request a debt consolidation loan. If approved you may be able to combine all of your obligations into a single account. Take this step at least two months before purchasing an automobile.

Consolidating debts into one account may lower your monthly payments and improve a high DTI. This can happen in two different ways.

  1. Reduce the interest rate paid on obligations
  2. Extend the repayment terms over a longer period

Longer Term

Lower your monthly payments by choosing a longer term. Smaller monthly obligations make a high DTI more palatable for auto lenders. The reason is simple. The percentage is less onerous.

Remember, lenders will consider the ratio that includes payments for your new note. Look at how the principal only disbursements change based on the length of the repayment period.

This chart shows how the DTI for a $25,000 automobile purchase varies with several terms.

Periodic AmountTerm in Years
$2,0831
$1,0422
$6943
$5204
$4175

Refinancing

Refinancing an existing auto loan when you have a high DTI ratio follows the same logic as when extending the repayment terms. Longer terms will lower monthly outflows, making it easier to stay current on the obligation.

When refinancing, most people extend the repayment terms. You may begin the application process with a high fraction, but if approved the percentage looks much better when you spread the expenditures out over a greater length of time.

Of course, you increase your borrowing costs when you refinance. You may pay an origination fee, a higher interest rate, and more in overall interest charges as the interest has more time to accrue.

These forms of unsecured obligations may be hurting your qualifications.

Leasing

Leasing an automobile instead of buying is another alternative for lowering monthly payments when you have a high DTI ratio. Leasing follows similar logic as extending terms. If you continually lease your vehicles, you never reach a point when you stop owing money.

When you lease you gain the right to utilize the vehicle for a specified length of time. You pay a depreciation fee based upon the expected loss in market value. Even very old high mileage clunkers have positive residual value. Therefore, leasing may be the ideal option.

Down Payment

Making a larger down payment in another way to lower your DTI and improve your auto loan approval chances. The more money that you put towards the deposit the less you must finance.

However, saving enough money to make a significant down payment is very hard. High debt service obligations consume a big portion of your monthly income. Consider selling your old jalopy privately rather than trading it in. You may be able to strike a better deal and use the proceeds towards the deposit.

Cheaper Auto

You can lower your monthly payments and improve a high DTI by choosing to finance a cheaper automobile – or repairing your existing vehicle instead. The lower the price the less you owe every single month, holding term and interest rates constant. It is also the one factor most in your control. Ignore the more expensive models the dealer wants you to purchase.

Look what happens to your principal only expense for a 5-year loan based upon the sticker price. You can purchase a reliable used vehicle for $15,000.

Periodic AmountVehicle Price
$583$35,000
$500$30,000
$417$25,000
$333$20,000
$250$15,000

High Debt to Income Ratio Car Loans – More Income

The second strategy for getting a car loan with a high debt to income ratio involves truthfully increasing the earnings you report on the application. Your monthly gross income is the important denominator in this important underwriting fraction.

You can accomplish this second objective via a cosigner, joint account, or by taking on another job.

Extra Job

Taking on a second job will boost your earnings. More earnings translate into a better fraction, provided it is not a temporary position. Doing so might help you qualify for an auto loan with a high DTI ratio. You must start well enough in advance of the application.

The lender will want to verify at least three months of earnings from a second job. The longer the working history is, the greater the chance that the earnings will continue throughout the length of the contract.

Self-employed individuals may want to declare more income on their taxes, rather than hiding anything not reported on a 1099 form. This helps with having the proper documentation in place.

Co-Signer

Adding a co-signer improves your odds of an approval when applying for an auto loan with a high DTI ratio. A co-signer promises to make payments on your behalf in the event you are unable to stay current.

Using a co-signer is a simple way of increasing the income you report on the application. It tells the bank that another person will step in and pledge a portion of his or her earnings to help stay current on the account. This reduces the risk that the account will become delinquent, and require repossession.

Joint Account

Applying for a joint account can increase your odds of approval for an auto loan when one person has a high DTI ratio. A joint account can include husband and wife, parent and child, two sibling, and other combinations.

Underwriters considering a joint account will add the two incomes together. Of course, they will also add the two sets of debt service obligations together. Therefore, the second person would need to have a lower debt burden to make this strategy work.

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