Whether you’re leasing a vehicle for personal use or business, your debt-to-income ratio can come into play in several ways. You ratio can affect your personal budget goals and impact your credit score, affecting whether or not you get the lease. Any car lease is considered debt. Reviewing this credit factor will help you see how a lease might impact your personal finances.
Debt-to-Income Ratio Explained
Your debt-to-income (DTI) ratio is a measurement that shows lenders what percentage of your monthly income is being used to pay back amounts you owe, explains the Consumer Financial Protection Bureau. It’s not a comparison of your total debt to total income. For example, if you have a salary of $80,000 and debt of $20,000, those aren’t the numbers a car leasing company or other lender uses to calculate your DTI ratio.
If your mortgage, student loan, credit card and other monthly credit payments total $3,000 and your monthly income is $5,000, those are the numbers used to calculate your DTI ratio. The higher your debt to income, the more trouble you might have paying your monthly debts (including your car lease), making you a riskier borrower.
Does Leasing a Car Affect Your Debt-to-Income Ratio?
Leasing a car does affect your DTI ratio. The more debt you have, the higher your DTI ratio unless you increase your income at the same time you increase your debt. A lender will start with your current monthly payments and then add in the amount of your new lease payment to see what your DTI ratio will be.
If you are leasing a car for business use, your company’s DTI ratio probably won’t come into play. The lender might look at your assets, credit score and other factors. If you’re doing business as a sole proprietor or DBA, the lending company will then look at your personal credit.
In most cases, a lease company will look at your credit score, credit history and current income to determine if you’re creditworthy. It might ask you to provide the amounts of several of your major monthly bills, such as housing, credit cards and other debt payments. If you falsify your monthly debt payments on your application, you are breaking the law, and at the very least, your lessor can terminate your lease and take back your vehicle.
In addition to your DTI ratio, a car lease will increase your debt-to-credit ratio. This is the amount of credit you have available and the amount you’ve already used. The more credit you’ve used, the higher your DTC ratio, which lowers your credit score.
When you lease a car, your lease amount will be added to your other credit (such as a student loan and credit card debt). Since you won’t have paid off any of your car lease obligation, your DTC ratio will climb. Even if you get the lease, your credit score might drop in response to your increased DTC ratio.
Is leasing a car considered debt? Yes. The good news is that a car lease is considered installment credit, which is different than revolving credit (such as credit card debt, which changes every month).
Having installment credit shows lenders that other lenders have decided you are creditworthy, and this type of credit can improve your credit score. The type of credit you have (or your credit mix) makes up 10 percent of your FICO score, explains myFICO.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.