Debt to Income When Buying a Car

Despite good credit, you might be declined for an auto loan if your debt isn't properly proportioned with your income, this is known as your debt-to-income ratio. The Home and Finance Family Resource Center reports that a debt-to-income ratio under 36 percent is ideal for loan approval. Loan providers determine your debt-to-income ratio from information obtained from your credit report and credit application.

Calculating Debt

Your credit report lists your debts, such as loans, mortgages and credit cards. Lenders review your monthly payment requirements to calculate your debt responsibility. Your credit application lists additional responsibilities, such as renting a home. If you cosigned a loan, the monthly payment responsibility is also included in your debt-to-income ratio even though you don't make the monthly payment. Only minimum monthly payment requirements listed on your credit report and application, such as rental payment, are used to calculate debt. Living expenses, such as insurance policies, food or car maintenance, aren't used to calculate your debt.

Income

Lenders use the income you earn each month before taxes to determine your debt-to-income ratio. Unless you earn a salary, meaning you earn the same amount every pay period, you'll have to calculate your monthly income yourself to submit with your credit application. To do so, divide your year-to-date earnings by the number of weeks passed in the year. For example, if your pay stub states that you've earned $35,000 this year and 20 weeks have passed, divide $35,000 by 20. Multiply your answer by 52, and divide the answer by 12. The result is your monthly income, which you can divide by your monthly payment responsibility to determine your own debt-to-income ratio.

Additional Income or Self-Employment

Your auto loan provider might allow you to include additional sources of income, such as child support, alimony, Social Security or a pension. Expect to prove any additional sources of income you add to your employment income on your credit application. If you're self-employed, your lender will likely require at least a two-year tax return history to verify income. If you've been self-employed for less than two years, you might find it difficult to obtain an auto loan.

Solving Debt-to-Income Problems

If you were declined for an auto loan based on your debt-to-income ratio, the lender doesn't believe you can afford to make your requested monthly payments. If you earn money elsewhere but can't prove so, you can't use the income as a basis for repaying your loan. Using a co-signer might help you obtain an auto loan approval. If you have excellent credit, you might choose a co-signer with fair credit, as long as his income and debt-to-income ratio are satisfactory. If you have poor credit and little income, you'll need a co-signer with a strong credit score and debt-to-income ratio for loan approval.