Debt to income ratio is the amount of debt a person has compared to the amount of income a person makes in a year and is important for buying a car. By determining the debt to income ratio, a person can determine if they have the available funds to purchase a car with financing and can reduce their interest payments. The lender looks at debt to income ratio because a lower debt to income ratio shows a person's ability to pay back a loan. A higher debt to income ratio, means a lender will take on a higher risk of the borrower defaulting.
Calculating Debt to Income Ratio
Calculate all debt paid monthly and monthly income, then divide debt by monthly income. For example a person has $40 in credit card bills and a $200 mortgage each month. The person also makes $2,000 a month. His debt to income ratio is $240 divided by $2,000 which equals 12%.
CCCS Recommendations
The Consumer Credit Counseling Service (CCCS) recommends a debt to income ratio below 15% (see reference 1). The CCCS is an excelled resource for providing information on consumer credit for individuals.
Ratio to Obtain a Car Loan
According to MSN Auto, a debt to income ratio below 20% will allow a person to obtain financing for a car. Any ratio above 20% could reduce chances of obtaining a loan.
Results of High Debt to Income Ratios
A high debt to income ratio will result in either denial of credit or increased interest rates. Increased interest rates force the person to pay more money through interest than if he had a lower debt to income ratio.
Online Calculators
For ease of use, several pages offer online calculators. These online calculators often allow the user to change different variables in order to find out how much debt reduction is needed to have a specific debt to income ratio. MSN, Consumer Credit and Credit.com offer online debt to income ratios.
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