Your gross monthly income helps determine how much money auto lenders are willing to lend you. Your income is also one of the factors that lenders look at when determining your interest rate. Lenders consider you less of a risk when your income is high and your debt low. That increases your odds of receiving the auto loan you need at a low interest rate.
When determining how likely you are to default on a car loan, lenders look at a key debt-to-income ratio known as your back-end ratio. This ratio compares your gross monthly income -- your income before taxes are taken out -- and your total monthly debt. If your back-end ratio is too high, your lender will be less likely to loan you money to buy a new car. Your lender will also be more likely to charge you a higher interest rate because your high debt-to-income ratio makes you as a higher-risk borrower.
Most lenders prefer that your total monthly debts equal no more than 36 percent of your gross monthly income. When determining your back-end ratio, lenders consider such debts as your monthly mortgage payment, estimated new car-loan payments, minimum monthly credit card payments and student loan bills. If your total monthly debts equal $2,500 and your gross monthly income is $7,000, your back-end ratio would stand at 35.7 percent, just under the 36 percent recommended maximum.
Your income, then, directly impacts the amount of money a lender will loan you for a car purchase. By calculating your debt-to-income ratio, your lender will know exactly how large of a monthly payment -- and, therefore, how large of a total auto loan -- you can comfortably afford.
Your income isn't the sole factor that determines how much you can borrow to buy a car. Your lender also will look at your credit score, a three-digit number that sums up how well you've managed your money and credit. Your score will be lower if you have a history of missed payments or if you've run up too much credit-card debt. In general, lenders consider a credit score on the FICO scale of 740 or higher to be a good score.The higher your score, the less risky lenders view you. A high credit score can help make up for a lower gross monthly income.
- How to Calculate Total Debt Ratio
- What Percent of My Income Should I Spend on a Car?
- How to Calculate the Maximum PITI for an FHA Loan
- Can an Unmarried Couple Living Together File Jointly on Income Taxes?
- Does My Credit Score Matter When Someone Cosigns a Car Loan for Me?
- Does Having a Co-Signer on a Car Hurt Your Credit Score?
- How Much of Your Debt Should Be Taken Up by Your Mortgage?
- How to Qualify for a Car Loan