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Your debt-to-income (DTI) ratio is a quick way to assess the weight of the debt you’re carrying. Lenders use it to paint a picture of your financial situation as they decide whether to loan you money. A DTI ratio of 36% or less is typically considered acceptable when you’re applying for a personal loan, though a DTI ratio of up to 50% may be allowed for debt consolidation loans.
The math to determine your personal DTI ratio is fairly simple: You divide your monthly debts by your gross monthly income (your income before taxes and other deductions are taken out). Let’s dig into the DTI calculations in more detail to learn how they impact your ability to qualify when you apply for a personal loan.
Key Points
• A good debt-to-income ratio for personal loan approvals is 36% or less, though some lenders may approve up to 50% for debt consolidation purposes.
• The DTI ratio is calculated by dividing your total monthly debt payments by your gross monthly income.
• Lenders primarily look at your back-end DTI ratio (total debts divided by gross income) for a personal loan application.
• A strong credit score and stable income may help offset a higher DTI for personal loan applications.
• To lower a high DTI ratio before applying, you can pay down credit card balances, refinance high-interest loans, increase your gross income, or do all of the above.
What Is a Debt-to-Income Ratio?
Your DTI ratio, at the simplest level, is your debt divided by your income. The higher the number is, the more heavily your debts are weighing on your budget. But what counts as debt? The list of things you should factor in is quite long and includes ongoing debts like credit card minimum payments, auto loan payments, and your mortgage or rent. What doesn’t factor in is almost as important: Routine expenses such as utilities, groceries, and incidental purchases should not be counted.
Front-End vs Back-End DTI
Lenders evaluating your application for a personal loan will look primarily at your back-end ratio, which is the total of your monthly debts divided by your gross monthly income. If you are applying for a home loan, a lender will look closely at your front-end ratio, which is the total of your current or projected housing expenses divided by your income. That would be your mortgage payment, but also property taxes, mortgage insurance, homeowners insurance, and any homeowners association (HOA) fees. But when you’re applying for a personal loan, it’s the back-end ratio you’ll want to keep an eye on.
How to Calculate Your DTI for a Personal Loan
The formula for calculating your back-end DTI ratio for a personal loan is fairly simple:
Step 1: Add up your monthly costs for the following:
• Rent; or mortgage, home insurance, HOA fees, and property taxes
• Home equity loan or home equity line of credit
• Student loans
• Credit card debt
• Auto loans
• Any existing personal loans or lines of credit
• Child support
• Alimony
Step 2: Divide your monthly costs by your gross income. Your income would include any salary you earn but also any other income sources such as investment income or disability payments.
Step 3: Multiply by 100 to arrive at the DTI ratio percentage.
What Is a Good DTI for a Personal Loan?
When you’re applying for a personal loan, including a home improvement loan or wedding loan, your DTI ratio truly matters. You’ll be best situated for approval at the most competitive interest rate if you have a DTI ratio at or below 36%. Lenders may approve personal loans for people with higher DTI ratios, in certain cases as high as 50%, especially for debt consolidation.
Each lender has its own threshold, and your credit score and other factors, such as the reliability of your income, could be factored into the approval decision. A very strong credit score might, for some lenders, outweigh a higher DTI ratio. Other typical personal loan requirements include proof of income and employment. If you are self-employed, you may be asked to submit additional proof of bank deposits or your business profit-and-loss statement.
DTI Ranges and What They Mean
As we’ve seen, the best DTI for a personal loan approval is 36% or below. A DTI ratio of 37% to 43% is still considered good sometimes. And a DTI ratio of 44% or 45% will be okay with some lenders. At the 46% to 50% range, it will be especially important that your other financial metrics, such as credit score, are impeccable.
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How DTI Affects Your Personal Loan Terms
If your DTI ratio and other financial metrics allow you to qualify for a personal loan, the lender may use your DTI number as it computes your loan terms, including your interest rate. Your credit score will also be important when qualifying for a personal loan. The minimum credit score required for a personal loan is typically 610. Again, lenders may have different standards for an applicant’s credit score, and may weigh DTI ratio, credit score, and other factors against one another when determining whether or not to approve an applicant for a personal loan.
How to Lower Your DTI Before Applying
If your DTI ratio is on the high side of acceptable or exceeds lenders’ commonly accepted max, you can work to lower the number before you apply for a personal loan. Let’s take a look at some strategies to use before you apply for a loan.
What to Do If Your DTI Is Too High
When you’re facing a DTI ratio of 50% or more, you might want to take steps to reduce your debts before applying for a personal loan or mortgage or another form of credit. Here are a few things you can do to reduce your ratio:
Pay off credit card balances “If you’re looking to pay off your debt faster, it’s a good idea to take a look at your spending and income, find ways to reduce your nonessential spending, and then funnel any money you free up toward your debt repayment plan,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. When you are carrying a balance on multiple cards, pay off the card with the highest monthly payment first, because the DTI ratio is based on payment size (not interest rate). Bringing down your monthly credit card payments will reduce your DTI ratio fairly quickly, especially if you pay down the debt before the closing date of your next monthly statement.
Explore a lower interest rate If you are having trouble making credit card payments, try calling the card issuer and requesting a hardship accommodation. Some lenders will provide a temporary reduction in interest rate. This could, in turn, help you qualify for a debt consolidation loan that will further reduce your debt payments. You can also try applying for a credit card consolidation loan without requesting an accommodation from your credit card company. If you are approved, the loan will pay off your credit card debt, and you’ll make one monthly payment to pay off the loan. This often results in a lower DTI ratio because the debt consolidation loan interest rate may be lower than the interest rates on your credit card debt.
Refinance a high-interest loan If your home or auto loan has an interest rate that is noticeably higher than the rates currently available in the market, explore a refinance to lower your monthly payments.
Increase your income Consider extending your work hours or seeking a second job or side hustle to grow your income, which will lower your DTI ratio.
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The Takeaway
A good debt-to-income ratio for a personal loan is 36% or less, though it may be possible for some borrowers to qualify for a personal loan with a DTI of up to 50%, especially for debt consolidation. Having a healthy DTI ratio can also help you obtain the lowest available interest rate for your personal loan. If your DTI ratio tops 50%, you may want to take steps to reduce it before applying for a personal loan. Once you’re ready to apply, survey the market to find the lender with the best interest rate, good terms, and a solid customer service reputation.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Is DTI the only factor lenders consider for personal loan approval?
Your debt-to-income (DTI) ratio is not the only factor lenders evaluate when considering your application for a personal loan. A lender will also look closely at your credit score and employment and income history when assessing your application for a personal loan.
Can I get a personal loan with a 50% DTI?
It may be possible to get a personal loan with a 50% DTI ratio for debt consolidation purposes. Typically, lenders prefer to see a DTI of 36% or lower. If you’re applying for a personal loan with a DTI on the high side, lenders will look closely at other personal loan requirements, such as your credit score and employment history (to assess how stable your income may be). You might consider taking a couple months before applying to try to reduce some debts or increase your income to bring your DTI ratio down.
Does a personal loan affect my DTI ratio?
The monthly payments you make on a personal loan will be included in your debt-to-income (DTI) ratio. Assuming you add a personal loan and don’t reduce any of your other debt payments or see an increase in your gross income, taking on a personal loan will increase your DTI ratio. The extent of the increase will depend on your overall debt level, your income, and the amount of your new loan payment.
How long does it take to improve my DTI?
It can take from 30 to 90 days to see an improvement in your DTI ratio. If you pay off a credit card balance before the next statement date, you’ll see improvement quite rapidly — maybe within the month. If you get a new job with a higher salary, you will probably want to wait a few months before applying for a personal loan, as lenders like to see consistent, reliable income.
What is the difference between DTI and credit utilization?
Your DTI (debt-to-income) ratio is the total of your monthly debts (credit cards, student loans, auto loans, etc.) divided by your gross monthly income. Your credit utilization is the percentage of your available credit that you are using. Available credit includes the credit ceiling on any credit cards you have, as well as the credit ceiling on a home equity line of credit (HELOC), if you have one. Both DTI ratio and credit utilization are expressed as percentages, but they are totally different numbers.
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