Methods for calculating the debt-to-income ratio

The debt-to-income ratio for personal loan (DTI) divides the total of all monthly debt payments by your gross monthly income, which gives you interest. The most important aspects: lenders use DTI and credit history to assess whether a borrower can repay a loan, each lender sets its own DTI requirements, personal loan providers generally let higher DTIs than mortgage lenders.

Features of calculating the debt-to-income ratio

Your debt-to-income ratio (DTI), along with your credit history, is considered a critical factor in your lending decision. A DTI of 36% is generally regarded as manageable.

How to calculate debt-to-income ratio? Specify the payments you owe, such as rent or mortgage, student and car loan payments, credit card minimums, and other recurring payments. Then change the slider for gross monthly income.

Suggestion a borrower with $1,300 rent, $350 car payment, $250 minimum credit card payment, and $7,000 gross monthly income has a debt-to-income ratio of just over 27%.

How lenders analyze clients' DTI ratio

Lenders pay attention to debt-to-income ratios because studies show that borrowers with high DTIs are more likely to have repayment problems.

Each lender sets its debt-to-income ratio for credit card approval. Not all lenders, such as personal loan providers, publish a minimum debt-to-income ratio, but generally, it will be more generous than, say, a mortgage.

You can find personal loan providers willing to lend money to consumers with a debt-to-income ratio of 50% or more, and some delete mortgage debt from the DTI calculation. One of the most common uses for personal loans is credit card debt consolidation.

The optimal debt-to-income ratio for student loan refinancing depends on the lender, but typically lenders look for a DTI of no more than 50%.

The impact of DTI on a client's credit score

People often think about how my debt-to-income ratio affects my credit score. Credit reporting organizations may know your income but not include it in their calculations.

But your credit utilization ratio, or the amount of credit you use compared to your credit limits, affects your credit scores. Credit reporting organizations know your available credit limits for individual cards and in general. Most experts advise keeping balances on your cards no more than 30% of your credit limit. Below is better.

To reduce your debt-to-income ratio, you either need to make more money or lower your monthly payments.

Deciphering the DTI coefficient

Specialists recommend to calculate debt-to-income ratio to determine how to manage your debt and whether it has become unsustainable. Experts have compiled general rules for you:

  • DTI is up to 36%: this low debt-to-income ratio means the debt is quite manageable compared to your income. You should have no problem accessing new loan products.

  • DTI is from 36% to 42%: such a level of debt can cause lenders to worry, and you may have trouble getting the money on loan. Think about paying off what you owe. You can probably take a do-it-yourself variant; two typical scenarios are debt avalanche and debt snowball.

  • DTI ranges from 43% to 50%: repayment of this level of debt can cause several problems, and some lenders may reject any loan applications for a significant amount. If you have principal credit card debt, consider consolidating it. You can also look into a debt management plan from a non-profit credit counseling organization. Such companies usually offer free advice and will help you understand all debt relief options.

  • DTI is more than 50%: it's bad debt-to-income ratio; repaying this level of debt will be difficult, and your ability to borrow will be limited. Weigh the various options for debt relief, including bankruptcy, which may be the quickest and least disruptive option.

Knowing how to figure debt-to-income ratio is essential because you can always get out of a difficult situation and improve your credit score.

When to ask for debt relief

Analyze bankruptcy, debt management, or debt settlement when one of the following conditions is true:

  • You have no hope of paying off unsecured debt (credit cards, medical bills, personal loans) within five years, even if you take every possible step to reduce costs.

Your unpaid unsecured debt is half or more of your gross revenue.

On the other hand, if you can potentially pay off your unsecured debts within five years, consider a do-it-yourself option.

Answers to the most frequently asked questions

What is my debt-to-income ratio?

The debt-to-income ratio, or DTI, divides your total monthly debt payments by your gross monthly income. The interest earned is used by lenders to evaluate your ability to repay the loan.

How to calculate DTI?

To determine your debt-to-income ratio, divide your total monthly debt obligations (including rent or mortgage, student loan payments, car loan payments, and credit card minimum) by your gross monthly income.

What is an optimal debt-to-income ratio?

A debt-to-income ratio of 36% is generally called manageable. If it's lower, that's even better.

What does the debt-to-income ratio include?

Your debt-to-income ratio includes monthly debt obligations (rent or mortgage, student loan payments, auto loan payments, and credit card minimums) divided by your monthly revenue.

On this page