Amount You Can Borrow Based on Income and Credit Score
Many people, especially those with bad credit, may be willing to pay a large amount each month but lenders will only approve loans based on what borrowers can afford to pay.
The main thing lenders look at is your debt to income ratio (DTI), the percentage of your monthly gross income that goes toward paying debts.
Lenders like to see a DTI ratio of 40% or less, which means if you bring in $5,000 of income each month, your debt payments should be no more than $2,000.
Debt includes any installment loans such as car payments, student loans or personal loans, plus any rent or mortgage payments. It also includes your minimum monthly credit card payments. Normal expenses such as groceries and utility bills are not included as part of your debt.
In general, here is how lenders view your DTI ratio:
|36% or less||This is the ideal debt load for most people.|
|37% - 42%||Borderline high||43% - 49%||Financial problems likely to occur unless debt is reduced.||> 50%||Very dangerous debt level. Need to reduce debt immediately.|
If you have an excellent credit score and a decent level of disposable income, then your DTI ratio won't really matter. People with higher than average income ($7,000 + per month), those with disposable incomes of at least $3,000 per month, and those with very large down payments of 50% or more won't have to worry much about the amount they can borrow.
On the other hand, if your credit isn't that great and you have a lot of debt, then you really need to figure out what kind of payment you're likely to qualify for.
Here's a quick guide to the kind of loans you're likely to qualify for based on credit score and income.
|Credit Score||Max DTI Ratio||Monthly Payment||Max Term||Notes|
|720 +||N/A||30% of gross monthly income||60+ months||Lenders will allow any reasonable payment based on disposable income|
|640 - 720||Less than 50%||20% of gross monthly income||60+ months|
|590 - 639||Less than 45%||17% of gross monthly income||48 months|
|530 - 589||Less than 40%||15% of gross monthly income||36 months||Many lenders will limit loans to a maximum of $6,000|
|< 530||Less than 35%||15% of gross monthly income||24 months||Many lenders will limit loans to a maximum of $5,000|
What you need to do is first check your credit score, then get a financing quote from online providers to see what kind of payment you qualify for.
You can then compare that figure to the charts above to make sure you're within the acceptable range. If you're not able to borrow as much money as the charts indicate, you may have some errors in your credit report (See: How to Fix Errors in Your Credit Report).
My Recommendation for Car ShoppersTrueCar No-Haggle, Edmunds Price Promise and 1-800 Car Show are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
About: Gregg Fidan
Gregg Fidan + is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.