by Chelsea Springli 
Studies show that most American families own two cars. But taking on multiple auto loans is a big decision. How do you know if you’re ready? Use these tips as guides to help you decide if you’re prepared for a second (or third) auto loan.
Check Your Credit
Your credit score and debt to income ratio (DTI) will be the main sources that lenders will review to determine if you’re trustworthy to lend money to. Your debt to income ratio is your monthly gross income divided by your minimum monthly debt payments expressed as a percentage. A low DTI ratio is generally a signal that you can afford another loan payment. A good DTI ratio is 35% or less. A 36% to 45% DTI ratio can be manageable but could be improved before applying for a large car loan.
According to FICO, the largest factor in determining your score is your payment history. The timeliness with which you pay your bills makes up over a third of your overall score. If you’re paying your current auto loans (and any other loans) on time, you’re on your way to maintaining a good credit score.
Determine Your Budget
Even more important than securing the loan from a lender is whether you can you afford an auto loan. Take the time to look at your expenses and foresee how adding another auto loan monthly payment will impact your financial journey. Look over how you’re currently spending money and categorize your transactions into four spending buckets:
- Needs
- Wants
- Saving
- Giving
How much of your money is going into each bucket? Will another auto loan payment take away from your goals for those four areas? Or do you have room to take on a new auto loan? Remember, your car payment isn’t the only piece of the puzzle. Be sure to leave room for sales tax, gas, maintenance, insurance, and any emergencies that may arise. Learn how to create a budget.
Do the Math
After you check your credit and determine your budget, you can work the numbers to see if you can comfortably manage another car loan. Here’s an example for guidance.
A and B have a combined monthly gross income of $9,160. They have a mortgage that costs $2,000 a month, a credit card with a $40 minimum monthly payment, and a car loan with a $375 monthly payment. Their current debt totals $2,415, which gives them a 26% DTI ratio. To keep their DTI ratio at 35% after adding another loan, they need to keep their totally minimum monthly payments at $3,206. This means they can afford $791 more in minimum monthly payments.
Next, Austin and Jeslyn look at their current budget and savings. They believe they can comfortably manage a payment up to $840, even though they’d rather keep their DTI ratio lower. Using our Calculate a Vehicle Payment calculator, Austin and Jeslyn entered in their ideal situation. they found a Hyundai Tucson for $34,000. They have $5,000 saved for a down payment and believe they’ll get $2,000 from trading in their older car. After estimating their sales tax rate and interest rate, the monthly payment totals $580, which is well below $791.
Consider Auto Loan Alternatives
If you think you need two cars, but you’re not ready to jump in just yet, don’t feel trapped. There are plenty of alternatives to consider. Public transportation, biking and carpooling can often carry you through until you’re ready to take on another auto loan. This can buy you time if you want to save for a larger down payment, try to pay off debt first, or strive to improve your credit score before applying. Many professionals are exploring options with remote working to save on costs (gas, parking fees and mileage all add up).
Buy Your Next Car
Consider all of your options before making your decision to apply for another auto loan. Adding a second car loan is a several year commitment, so it’s key that you can maintain another loan before saying yes. By reviewing your credit score, you can gauge your interest rate. Calculating your DTI ratio will help you see if you can afford a second car loan based on your other loan payments. Don’t forget to look at your budget to see where a loan payment would fit in. Check out our free online calculators to get a better feel for what car payment will work best for you, vehicle affordability, purchasing or leasing a vehicle, and more.
