One way to look at the affordability of an auto loan is through its monthly payments. From your end, you can easily determine how much monthly car payment you can afford to make by looking at your payment to income ratio. This rough estimate will guide you in shopping for auto loans. And if your credit is bad, it will give you an idea if you qualify for a loan.
PTI vs DTI
A payment to income ratio works differently from the debt to income ratio despite being based on your gross monthly income.
The DTI has a wider scope, summing all your monthly revolving and installment debts and dividing them by your pre-taxed monthly income.
In contrast, the PTI in the context of car loans is focused on a projected monthly car payment plus car insurance divided by the gross monthly income.
Calculating the PTI
While lenders have varying PTI benchmarks, a good ratio especially for bad credit loans is perceived to be anywhere between 15% and 20%.
With a monthly income of $2,000, multiply it by 0.15 and you’ll get $300. This is roughly the car loan payment you can afford every month, something you can use when you shop for a loan.
But wait, you need to factor in the car insurance monthly premium, which can between $100 and $200. Subtracting $100 from $300 and you’ll get $200 which ought to be your goal for a monthly payment.
Exceeding the PTI
It happens that when the lender computed your payment to income ratio, it exceeds 20%.
This could make things difficult for you because lenders will be hesitant to lend money to someone who may not be able to pay it back.
Moreso that subprime auto lenders are particular with PTI given that the borrower must show that his/her income is sufficient to take on the debt. A higher PTI ratio could send your application back or you’ll need to make it up with other factors as the lender deems.
Do also note that your DTI, including your projected monthly car payment should be no higher than 50%.
All things held equal, the PTI, together with the DTI, is a powerful yet subtle indicator of your capacity to pay back your loan. Of course, repaying a loan is a huge financial responsibility and it would make things easier if you know just how much your pockets can accommodate right from the start.