Brainy Loans

What is the Debt to income ratio and how to calculate it?

Your Debt To Income Ratio (DTI) is the difference between your income compared to your expenses or bills. It’s a ratio that is calculated by adding up all your expenses and dividing them by your gross monthly income.

DTI is used to evaluate the borrower’s ability to repay the loan, each lender uses their own DTI ratio percentage to evaluate the buyer. Personal Loans lenders allow a much higher Debt To Income ratio compared to standard loans such as car, house, or business loans.

How debt to income is calculated.

DTP is pretty simple to calculate. You add up your car payment, rent, student loans, card payments, and everything you pay monthly, then divide the amount by your monthly income which will give you your debt-to-income ratio in a percentage. 


For Example, You pay $1,000 for rent, leasing a car for $300, and some loan payments of $600 dollars. Your current income is $4000 dollars monthly. What you do is add up your expenses which will be $1,900 then divide it by your $4000 monthly income giving you a 47.5% debt-to-income ratio.

How debt to income ratio is viewed by the lenders.

DTI ratio is an important factor lenders consider when giving out a loan to consumers, research shows that people with higher DTI have a harder time making payments on their loans which adds more risks for them not getting paid back on the loan. 

Lenders all have a certain market they appeal to. This means that all have a certain debt-to-income ratio they aim to give loans. Depending on which loan you’re getting there might be a debt-to-income ratio lenders are looking for usually more common in loans such as mortgage and auto loans. Lenders generally are looking for under a 50% DTI ratio but there are many lenders that will go over that usually lenders that offer personal loan options.

How does your DTI affect your credit score?

Debt To Income ratio does not affect your credit score directly due to it being just a metric lender use to calculate the risk of you not paying back the loan. But on the other hand, the credit utilization ratio is a metric that will affect your credit score.

Credit reporting agencies use credit utilization metrics to compare the amount of credit you’re using compared to your credit limits and if your debt is too high will affect your credit score.

Usually, credit report bureaus take a look at all your credit limits in total and are advised by experts that your debt should not exceed more than 30% of your limit. To reduce your credit utilization metric, you need to make more or pay down your debt, eventually boosting your credit.

Understanding your Debt To Income ratio.

DTI is a good metric to understand how much debt you have and if you’re pushing too much debt for your income helping you determine your financial situation. 

Debt to income 36% and less

Having a debt to income under 30% is the most ideal situation but hovering around 36% you are more likely to get the most amount of loan offers and still be able to manage your finances. 

Debt to Income 36%-42% 

With DBT over 36% you will be cutting down your options for lenders but will still have a pretty good selection of loans and a fairly good interest rate. Usually recommended to pay down the loan a little. 

Debt To Income 43%-50%

DBT ratio closer to 50% is when you approach an amount that eliminates a lot of good creditors from lending to you because it increases the chances of you not being able to afford to pay them back. Usually recommended to look at debt management programs or debt consolidation offers. 

Debt To Income 50% and over

If you are over 50% DBT it makes it super difficult to apply for a loan, there are lenders that still might loan to you but will have higher interest rates and will do lower loan amounts. Usually, it’s recommended to look into different debt relief programs. 

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