Companies that lend unsecured personal loans make their qualifying decisions according to a loan applicant’s three important financial histories: credit, employment, and income – each an industry standard. And the most important history – income, because it includes the Debt-to-Income (DTI) ratio.
DTI is a calculation used to determine the percentage of monthly income a loan applicant uses to meet the minimum monthly payments’ on his or her existing debt.
Example: Debt-To-Income (DTI) ratio calculation
Debt – total minimum monthly payments: $600
Income – total monthly income: $1500
DTI ratio = ($600 ÷ $1500) = 47%
The lower a loan applicant’s DTI ratio, the more income they have available to make monthly loan payments.
Most lenders follow fixed industry-standard DTI guidelines when qualifying a loan applicant. And if a loan applicant exceeds an allowable DTI ratio, they won’t qualify for a loan.