A common calculation personal loan companies use to partially access late payment risk is the debt-to-Income ratio, commonly called their DTI. The ratio simply consists of debt divided by income. For instance if an applicant pays a total of $800 a month for his or her expenses, and their total monthly income is $1600, their debt-to-income ratio is 50%.
Every personal loan company has their own guidelines for calculating an applicant’s debt-to-income ratio. Some companies may include certain expenses in their calculations that others exclude. Each segment of the lending industry focuses their priorities differently; however, every one wants to be repaid on time. Mortgage lenders include a front end DTI calculation that limits the ratio’s dividend or debit to the applicant’s housing costs. This produces a more favorable calculation for the applicant than one including credit card debt, student loans, alimony, child support, and any other monthly obligation.
An applicant should have a general idea of their current debt-to-income ratio, their potential lender’s minimum requirement, and how they factor their calculations.
The type of monthly income lenders use to factor their debt-to-income calculations may vary as well. If they use gross monthly income, which is an applicant’s income before taxes, it will produce a more favorable calculation then one factored with net monthly income, which is what remains after taxes are deducted.
Personal Loans and Bad Credit
Anyone considering personal loans for bad credit, especially for debt consolidation, should factor how any additional credit card purchase or extending existing lines of credit will affect their application and likeliness for approval.