When considering purchasing a car and getting a car loan it’s important to determine your maximum car loan amount based on your income. Lenders typically consider two key ratios: the payment to income ratio (PTI) and the debt to income ratio (DTI). Here we will guide you through the process of calculating your maximum car loan amount while adhering to the preferred ratios set by lenders.
Step 1: Calculate Your Monthly Gross Income
To begin, calculate your monthly gross income. This includes all sources of income before deductions, such as your salary, additional job income, bonuses, commissions, and any other regular sources of income.
Step 2: Determine Your Payment to Income Ratio (PTI)
The payment to income ratio indicates the percentage of your monthly income that can be allocated to your car loan payment. Lenders generally prefer this ratio to be around 12.5%. To calculate your maximum monthly car loan payment based on this ratio, multiply your monthly gross income by 0.125 (12.5%).
Example: If your monthly gross income is $4,000, your maximum PTI-based car loan payment would be $4,000 x 0.125 = $500.
Step 3: Assess Your Debt to Income Ratio (DTI)
The debt to income ratio considers your total monthly debt obligations in relation to your income. Lenders typically prefer this ratio to be no higher than 40%. To calculate your maximum allowable total monthly debt payments, multiply your monthly gross income by 0.4 (40%).
Example: If your monthly gross income is $4,000, your maximum allowable total monthly debt payments would be $4,000 x 0.4 = $1,600.
Step 4: Consider Existing Debt Obligations
Next, factor in your existing monthly debt obligations, such as mortgage or rent payments, credit card payments, student loans, car insurance, and other loans. Subtract the total of these existing monthly debt payments from the maximum allowable total monthly debt payments calculated in Step 3.
Example: If your existing monthly debt payments amount to $800, subtract this from the maximum allowable total monthly debt payments of $1,600. This leaves you with $1,600 – $800 = $800.
Step 5: Determine Your Maximum Car Loan Payment
Compare the maximum PTI-based car loan payment (from Step 2) and the remaining amount after accounting for existing debt obligations (from Step 4). The lesser of the two amounts represents your maximum monthly car loan payment while maintaining the desired ratios.
Example: If the PTI-based maximum car loan payment is $500, and the remaining amount after considering existing debt obligations is $800, your maximum monthly car loan payment would be $500.
Step 6: Estimate Your Maximum Car Loan Amount
When estimating your maximum car loan amount there are a few factors to consider. Your credit score, the interest rate, and the term of the loan. The table below lists the monthly payment per $1,000 financed based on the average interest rate as reported by Experian’s State of the Auto Finance Market for the fourth quarter of 2022. The term used for new cars is 72 months whereas the term for used cars is 66 months.
Average New Car Payments per $1,000 Financed
| Credit Rating | Credit Score Range | Avg. Interest Rate | Avg. Term | Payment per $1000 Financed |
| Super Prime | 781-850 | 4.75% | 72 | $15.98 |
| Prime | 661-780 | 4.90% | 72 | $16.05 |
| Nonprime | 601-660 | 8.12% | 72 | $17.58 |
| Subprime | 501-600 | 10.79% | 72 | $18.92 |
| Deep subprime | 300-500 | 13.42% | 72 | $20.29 |
| No Score | 0 | 19.95% | 72 | $23.92 |
Average Used Car Payments per $1,000 Financed
| Credit Rating | Credit Score Range | Avg. Interest Rate | Avg. Term | Payment per $1000 Financed |
| Super Prime | 781-850 | 5.99% | 66 | $16.56 |
| Prime | 661-780 | 7.83% | 66 | $17.44 |
| Nonprime | 601-660 | 12.08% | 66 | $19.58 |
| Subprime | 501-600 | 17.46% | 66 | $22.50 |
| Deep subprime | 300-500 | 20.62% | 66 | $24.31 |
| No Score | 0 | 25.00% | 66 | $26.93 |
The next step is to divide the calculated maximum car loan payment by the Payment per $1,000 Financed for your credit tier and vehicle type (new or used) from the tables above and multiply that amount by 1,000.
Example: Using the maximum car loan payment previously calculated of $500 the maximum car loan amount for someone with a credit score in the 661 to 780 range would be:
- New Car Calculation: 500 16.05 1,000 = $31,152.65
- Used Car Calculation: 500 17.44 1,000 = $28,669.72
Please note that the maximum loan amount does not equate to the maximum vehicle sales price. Instead, the maximum loan amount represents the “out the door price“, encompassing all taxes and fees, assuming no down payment is made. If you seeking the maximum sales price use our car affordability calculator which takes into account your income, trade-in, cash down payment, taxes, and fees.
Conclusion
By following the steps outlined above, you can calculate your maximum car loan amount based on your income while considering the preferred ratios set by lenders. Remember that the maximum payment is the lesser of the two calculations for the PTI and DTI. Be realistic about your financial situation and consider other expenses such as car insurance, maintenance, and fuel costs when determining a comfortable car loan payment. Taking these factors into account will help ensure that you make a car purchase that fits well within your budget and financial goals.
AutoByPayment.com offers accurate estimates of used car loan payments based on self-selected credit score, current rebates, down payment, and trade equity or negative equity, without customers having to provide their personal identifying information such as email and phone.