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Car Loans - How Lenders Calculate Debt Ratios. By David J. Lalonde.
After you apply for a car loan the bank will calculate your debt ratio. Your total income is not that important. It's what's left over that counts. Most lenders require that you have at least 50% disposable income left over after you close your car loan. The following items are used to calculate your debt ratio.
DEBTS & PAYMENT CALCULATIONS
If you have bad credit there are certain debts that are used by most lenders in determining if you customer qualify for a car loan.
NEW CAR PAYMENT
The basic rule is that your new car payment cannot exceed twenty percent of verifiable monthly gross income or the amount of income left after subtracting all applied debts, whichever is less. If you are requesting a second car loan the total of both car loan payments should not exceed twenty five percent of your verifiable monthly gross income.
RENT OR MORTGAGE
The basic rule here is the actual rent or mortgage amount with a minimum of $300, unless you show proof that you own your home free and clear (see example at the end of this section).
CAR INSURANCE
Most lenders include a dollar amount to cover car insurance. The average amount is one hundred dollars (100) dollars per open auto.
EXISTING OBLIGATIONS (As reported in the credit bureau)
Existing obligations are those obligations that you are currently responsible for. Items that are in charge off or collection status normally are not included in the debt ratio, although some lenders may use a percentage if the charge off was large and less than one year old.
TAX LIENS
Tax liens themselves will typically not disqualify you for a car loan. But a lender may include 2-5 percent of the balance in your debt ratio.
STUDENT LOANS IN DEFAULT
Typically student loans in default are treated the same as tax liens.
DEPENDENTS
Dependents are usually not a factor, although some lenders may use as much as 50-100 dollars per dependent when calculating debt.
PAYROLL DEDUCTIONS
Garnishments, child support, and loan payments to employer or credit unions are included in the debt ratio.
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