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Payment To Income Ratio Explained

When you have bad credit, lenders will need to look at factors other than your credit score to determine if you meet the eligibility requirements for a loan. For example, lenders want to know that you can afford the car you want to buy (read our blog to find out some Tips & Tricks To Build A Better Credit History). At CreditYES®, we look at your gross monthly income (before taxes) to help determine your eligibility.

Your lender will also want to know how much of your income is already being used for debts. This is known as your debt-to-income (DTI) ratio. This would include such items as housing payments, student loans, credit card payments, and other loans. Your debt should ideally not use up more than 35% of your gross income each month. You can learn more about debt-to-income ratios and how to calculate them by reading our blog post here.

After that calculation, lenders will want to figure out your payment-to-income (PTI) ratio. If you have an existing car loan, that would be figured into your DTI. If you don’t have one, or you’re considering taking on another, the lender will look at how much your new car payment would be combined with the monthly insurance rate for that vehicle. They will want to make sure that this new amount doesn’t overwhelm your finances. However, many lenders will look at your gross income, that is the amount you earn before taxes and other deductions are taken out, to determine eligibility. Lenders will often consider 15-20% PTI to be the maximum threshold.

You can calculate your PTI very simply. Just take your monthly gross income amount and multiply it by 0.15 to determine what 15% would be, or by 0.20 to determine what 20% would be. This may not be exactly what a lender is looking for, but it can give you a rough idea of what your combined car loan and insurance payment could be.