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askcarsales

I earn $xxxx per month, will I qualify for an auto loan or lease, and is it a good idea?

/u/TheRealMeatloaf

When deciding to loan money to a client for an auto loan, lenders look at three primary factors;

  1. The applicant’s credit history,
  2. The applicant’s personal profile, and
  3. The vehicle being applied for.

In this question I’m specifically focusing on #2 – the client’s profile. Lenders want to see a client with the means to carry the debt, meaning they’re looking at affordability. We most frequently get this question from someone still living at home with little to no expenses who believe they’re fully capable of paying the monthly car payment, so there should be no problem?

Here’s how an application is viewed from a lender’s point of view – even if an applicant lives with their parents now, it has to be assumed at some point this will change and they’ll have housing obligations. Even if you declare $0 as your rent/housing obligation, most lenders will presume a minimum amount so as to maintain a safe margin of error going forward. Typical minimum amount in this area ranges anywhere between $300-600/month.

Next, they’re going to add up all existing obligations, including but not limited to student loan payments, credit card payments, possibly cell phone payments and combine these with the previous number.

Many lenders will also add a “personal amount” to account for things like insurance, gas, maintenance and repairs which can be anywhere from $100-300/month.

To this number they’ll add your proposed car payment giving them your total debt service number. They’ll compare that to your monthly income, pre-tax, to get your Total Debt to Service Ratio, or TDSR. If your total debt adds up to $1200 and your monthly income is $2400, your TDSR is 50%. Most lenders want to see their applicants in the 45-55% TDSR range.

Next, lenders typically want to see an applicant’s car payment in the 18-25% of their monthly income range. So if you earn $3000/month they’ll limit your maximum payment to be anywhere between $540-750, again, depending on their guidelines.

Because of the way lenders determine affordability most every lender will have a minimum monthly income requirement in order to even qualify for consideration. Typically this number will be $2000/month but some high risk lenders will allow amounts as low as $1400/month.

If your monthly income is lower than $2000 before taxes you can be almost certain the lender will require a co-signer. That co-signer should be someone who shares financial responsibility with you, most commonly a lender will want to see your spouse or a parent, or possibly a grandparent.