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 a personal loan, 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.