Debt-to-Income Ratio Explained (and Why It Matters for Loans)
When you apply for a loan, lenders want to know if you can comfortably afford the payments. Your credit score is important, but it’s not the only factor they consider. Your debt-to-income ratio, or DTI, also gives lenders a snapshot of your overall financial obligations.
If you’re considering an auto refinance, you should first understand what your DTI ratio is, how to calculate your DTI, and how lenders use it to determine whether you qualify for a new loan.
What Is a DTI Ratio?
Your debt-to-income ratio compares your monthly debt payments with your gross monthly income—the amount you earn before taxes and other deductions—expressed as a percentage. Lenders use it to evaluate your ability to take on additional debt.
How to Calculate DTI
Suppose you earn $4,500 per month before taxes. Your monthly debt payments include:
- Mortgage: $1,200
- Credit cards: $300
- Student loans: $200
- Auto loan: $350
That’s $2,050 in monthly debt payments.
To understand how to calculate DTI, divide your total monthly debt payments by your gross monthly income. Multiply the result by 100 to convert it to a percentage: ($2,050 ÷ $4,500) × 100 ≈ 45% DTI
What Is a Good DTI Ratio for a Loan?
There isn’t one universal good debt-to-income ratio that guarantees loan approval on its own. Each lender has its own requirements, and DTI is considered alongside factors such as credit history, income, loan amount, vehicle value, and other financial information.
In general, a lower DTI is considered a “good” debt-to-income ratio, as it indicates that less of your income is already committed to debt payments. In turn, this makes you appear “less risky” to a lender. Many auto refinance lenders look for a DTI that’s 35% or lower, but some lenders will accept DTIs as high as 50%.
Your DTI for loan approval affects your auto refinancing options. A higher ratio doesn’t automatically mean you’ll be denied, but it may limit the lenders or terms available to you.
How DTI Affects Auto Refinancing
Your debt-to-income ratio for auto loans can be especially important when refinancing because lenders need to determine whether you can comfortably manage the new loan payment.
If you can lower your DTI, it may strengthen your refinance application. If your income has increased since you originally financed your vehicle, this may mean a lower DTI. Likewise, paying off a credit card or student loan can reduce your monthly obligations.
How Can You Lower Your DTI for Auto Refinancing?
There are two basic ways to lower your DTI: decrease your monthly debt payments or increase your income.
Paying down debt reduces the amount you owe each month. Increasing your income also improves your ratio, provided the income is eligible to be considered by the lender. You don’t necessarily need to eliminate all your debt to make a difference.
Refinancing your auto loan may also potentially reduce your monthly payment, which could lower your DTI going forward. However, it’s important to consider the complete cost of a new loan rather than focusing only on the monthly payment.
Compare Your Auto Refinance Options
Your DTI is only one piece of the lending puzzle. At Gravity Lending, we help drivers compare auto refinancing options from our network of lending partners. We help you look at the complete picture—your credit, income, debt, vehicle, and other factors all influence the offers you receive.
If you’re wondering whether your debt-to-income ratio auto loan profile could qualify you for refinancing, comparing your options can help you find out. A better understanding of your DTI can help you make a more informed borrowing decision—and potentially put you in a stronger position when it’s time to refinance.
Start with Gravity Lending to explore potential rates and terms based on your financial situation.