OK Climb Credit blog readers, it’s time to talk ratios — to be more specific, the debt-to-income ratio (DTI). Now before you close out this window to avoid having to deal with math, let us just say that we’ll make this very painless. Trust us. So what is the debt-to-income ratio? Your DTI is your monthly debt payments divided by your monthly income. And we’re here to break down the role this plays in your loan applications, including that Climb Credit loan application.
Why is my debt-to-income ratio important?
Many lenders, when determining whether an application qualifies, look at DTI as one of their criteria — your DTI can even affect the interest rate a lender will offer you. Having less existing debt to pay off is a good indicator that you’ll be more able to pay off the new debt you’re about to take on. After all, the lower your monthly payments are, the easier it is to make them!
Of course, not every lender looks at DTI, and each lender will weigh the importance of existing debt differently. Talk to each loan provider to see whether they take DTI into account and find out whether lowering that ratio will increase your chances of approval. For example: At Climb, we do look at DTI as one of many factors, so a lower DTI ratio can potentially lead to better loan terms.
Can I figure out my own debt-to-income ratio?
With just a simple calculation, you can check out your DTI yourself. First, add up all of your monthly payments. If you have $500/month in credit card payments, $300/month in student loans, and $350/month for an auto loan, your monthly debt is $1,150. Then, divide that by your gross monthly income. If you make $4,600/month before taxes, your debt-to-income ratio is 25%. (1,150/4,600 = 0.25)
So, if you’re going back to school and taking out another loan for your course, you could add another $184 in monthly payments and stay below a 30% DTI!
What is a good debt-to-income ratio, and how can I improve mine?
If you have a high DTI (many student lenders have a threshold between 20–30%), the good news is that you can better it. Broadly, there are three ways you can improve this for your application:
Lower your debt: by paying off some of your debt faster, you’ll improve your DTI. Research the pros and cons to see if refinancing is a good option for you. Or, if your lenders allow prepayment, rework your budget to free up more money to make early debt payments (here are some popular budgeting tools, so you can do just that).
Increase your income: or you can try lowering your DTI from the other half of the ratio. Consider your current commitments to see if you have time to take on additional work (e.g. a part-time job), or negotiate your salary at work. And some debt — like student loans — while increasing DTI in the short term, ends up benefiting you in the long run. After all, many of our borrowers were able to switch jobs and increase their salaries after going through programs at our partner schools.
Add a co-borrower: Climb Credit applications give you the option to add another person to your loan. If you have a high DTI, someone in your life with a low DTI may be a good co-borrower. With Climb loans, as long as the co-borrower qualifies, so does the main applicant.