What Is a Debt-to-Income Ratio? Everything You Need to Know

When it comes to achieving financial stability, one of the key ways to do it is by ensuring that your debt levels are manageable. But how do you determine if your debt is manageable or not?

Well, thanks to your debt-to-income (DTI) ratio, it is possible to determine if your debt is too much before you get to the point where paying it off becomes impossible.

So what is a debt-to-income ratio? How is it calculated? What is a good debt-to-income ratio to have? Continue reading to find out everything there is to know about debt-to-income ratio in our comprehensive guide.

What Is a Debt-to-Income Ratio?

The debt-to-income (DTI) ratio is a comparison of your monthly debt payments and your gross monthly income. Lenders use your DTI to make lending decisions when you apply for a personal loan, an auto loan, a mortgage, or any other type of loan.

It shows how much of your income goes towards paying off your existing debts. It also helps you determine whether you can afford to take out more loans.

How to Calculate Debt-to-Income Ratio?

To calculate your debt-to-income (DTI) ratio, you will need to compare your gross monthly income with the monthly debt payments. The gross monthly income is your income before any deductions and taxes.

Follow these steps to calculate your debt-to-income ratio:

1. Add all of your monthly debt payments.
2. Divide the sum by your gross monthly income.

Debt-to-Income Ratio Example

Imagine that you pay $1,000 every month for your mortgage, $400 for your credit card, and $800 for your auto loan. 

By adding up all of these payments, we get:

$1,000 + $800 + $400 = $2,200

If your monthly income is $7,000, divide the sum of your debt payments by your monthly income:

$2,200 / $7,000 = 0.314

In percentage, your DTI will be:

0.314 * 100 = 31.4%

What Is a Good Debt-to-Income Ratio?

Every lender has varying preferences for a good DTI. Generally, the lower your debt-to-income ratio, the better. Most lenders prefer a DTI of 43% or lower to approve mortgage and other loan requests. If you are applying for a loan, 

What Is a Bad Debt-to-Income Ratio?

When you apply for any type of loan, your lender will look at your debt-to-income ratio before approving the loan request. Your DTI ratio helps them determine whether you will be able to afford the monthly loan payments.

Any debt-to-income ratio above 43% is considered bad. You will have a hard time acquiring a loan with a bad DTI.

Conclusion

Your debt-to-income ratio is one of the most important things that lenders consider when reviewing your loan requests. It is an indication of your capability to take on any additional debts. 

So before you apply for a loan, make sure to calculate your debt-to-income ratio to determine your chances of approval. 

Cash in Minutes offers affordable personal loans to everyone in need. We also accept bad credit! So apply today to get your funding the same day.