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Does Leasing a Car Affect Your Debt-to-Income Ratio?

Leasing a car has some benefits. Is a reduced impact on your debt-to-income ratio one of them?

Justin Cupler

Contributing Writer at Tally

July 29, 2021

When shopping for a new car, you have a choice to make: lease or buy. With a lease, you'll generally get a lower monthly payment, certain tax benefits and the option to get a new car at the end of the lease term with minimal cash out of pocket. 

With a lease, you must either return the vehicle at the end of the term or purchase it for the residual value — the predetermined post-lease value of the vehicle. 

Since a lease is essentially a long-term rental, does leasing a car affect your debt-to-income ratio like an auto loan? We’ll cover the basics of your debt-to-income ratio and whether or not a lease affects it below. 

What is a debt-to-income ratio?

Your debt-to-income (DTI) ratio is your monthly debt payments and other monthly expenses relative to your gross monthly income — your pre-tax income — expressed as a percentage. 

Commonly included in your DTI are:

  • Minimum credit card payments

  • Personal loan payments

  • Car loan or lease payments

  • Mortgage payments or rent

  • Mortgage insurance payments

  • Real estate tax payments

  • Home equity loan payments

  • Home equity lines of credit (HELOC) payments

  • Personal line of credit payments 

  • Alimony and child support payments

So, if you earn $5,000 per month before taxes, and your total monthly payments on debt are $1,500, you have a 30% DTI ratio ($1,500 / $5,000 = 0.030 x 100 = 30%). Most lenders consider 36% or lower a good DTI ratio, though some lenders will accept a DTI of up to 43%

What is the difference between DTI and credit utilization?

Lenders often look at another ratio when considering you for a loan or credit card: credit utilization ratio. Your credit utilization, like DTI, is expressed as a percentage, but it considers the balances on your revolving debts. Revolving debts include credit cards, lines of credit and other debts with credit limits that you can use multiple times relative to their credit limits. 

For example, if you have a credit card with a $1,000 limit and a $250 balance as well as a $5,000 line of credit with a $1,000 balance, you'd have a 20.8% credit utilization ratio ([$1,000 + $5,000] / [$250 + $1,000] = 0.208 x 100 = 20.8%). 

Your DTI, on the other hand, includes all your monthly debt payments and other select monthly expenses relative to your income.

Another key difference is your credit utilization ratio is calculated solely from your credit report. Your DTI is a combination of what's on your credit report, your income statements and tax returns, but it also includes self-reported expenses, like alimony and rent. 

Finally, the difference between DTI and credit utilization is DTI has no direct impact on your FICO credit score. However, your credit utilization ratio can have up to a 30% impact on your FICO score

Does leasing a car affect your debt-to-income ratio?

Like adding a new car loan, leasing a car adds a new monthly debt payment to your credit report. This means it’ll increase your DTI ratio. 

For example, using the DTI calculation above ($1,500 per month in debt payments on a $5,000-per-month pre-tax income), adding a $400-per-month lease would push your DTI from 30% to 38%. 

Can you reduce a car lease's impact on your DTI? 

If you lease a vehicle, there's no way to prevent it from impacting your DTI ratio. However, there are ways to limit its impact. 

Here are some tips to help lower an auto lease's impact on your DTI. 

Watching for promotional lease offers

Some automakers prefer leasing their vehicles and have special offers to boost demand for leases. These promotional leases can sometimes hold exceptional value and include very low monthly payments. 

If you find a promotional offer that includes monthly payments, you'll minimize the lease's impact on your DTI.

Increasing your down payment

Similar to a down payment on an auto loan, most leases require a certain amount of money due at signing. If you increase the amount you pay when you sign the contract, the monthly payments will be lower, which will reduce the lease’s impact on your DTI. 

Negotiating pricing

Like buying a car, you can negotiate some parts of an auto lease. However, the process isn't as straightforward as asking for a lower price. There are only certain parts of a lease you can negotiate. 

This includes:

  • Gross capitalization cost: This is the equivalent of the selling price or market value of the vehicle. You can research to determine how much people are paying for the car you'd like to lease and present that data to the dealership to help lower the gross capitalization cost, which will lower your monthly payment. 

  • Trade-in value: The dealership wants top dollar for its new car, and you should expect the same in return for the vehicle you’re trading in. Research the fair wholesale value of your vehicle, not the retail sales value. Use that information to ensure you get a fair trade-in offer for your car. The more money you get for your trade-in, the lower your

    lease payment and the less impact it'll have on your DTI. 

  • Disposition fee: This fee covers preparing the vehicle for resale after the

    lease ends. Some dealers may be willing to waive this fee with no commitment on your end, but others may require you to commit to leasing another vehicle when your current lease ends. Waving this fee will lower your payment slightly, which will decrease its impact on your DTI. 

  • Money factor: The money factor is similar to the interest rate or annual percentage rate (APR) on a standard auto loan, as it represents the finance charges you'll pay for

    leasing the vehicle. Unlike the interest rate, dealers aren't required to show you this number when you sign the lease agreement, but you can ask to see it. Money factor is typically expressed as a decimal, like 0.00275, which you multiply by 2,400 to get the equivalent APR. If you have good credit, you may negotiate this rate and lower your payment, lowering its impact on your DTI. 

Getting a co-signer

If you have midrange credit or lower, qualifying for a lease may not be an issue. But, with a less than perfect credit score, you may get a poor money factor. This can result in a higher lease payment, which increases its impact on your DTI. 

You may be able to secure a better lease payment if you have a co-signer with excellent credit on the lease with you.

Will a car lease impact your debt-to-income ratio?

In short, yes, leasing a vehicle adds a debt obligation to your credit report, which increases your DTI ratio. However, there are ways you can negotiate your lease payments so its impact is not as significant. 

Some lease factors you can negotiate to lower the monthly payment include: 

  • Gross capitalization cost

  • Trade-in value

  • Disposition fee

  • Money factor

You can also search for low-cost promotional leases or even get a co-signer with excellent credit to reduce a lease's impact on your DTI. 

If you're struggling with DTI due to credit card debt, Tally1 can help. The credit card debt repayment app includes a low-interest line of credit. You can use this line of credit to pay off high-interest credit card debt and reduce your DTI. 

​​1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate.