Calculating Debt-to-Income Ratio for Personal Loans

Susan GuilloryUpdated March 3, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Debt-to-income ratio (DTI) is one of the factors lenders use to determine personal loan approval. Here’s what you need to know about the debt-to-income ratio for a personal loan, how to calculate your DTI, and what lenders are looking for.

Understanding the Debt-to-Income Ratio for Personal Loans

Your debt-to-income ratio is how much monthly debt you have compared to your gross monthly income (your income before taxes). It paints a picture of your financial status, and how likely you are to pay your debt, which is why lenders look at DTI when borrowers apply for a loan. In general, the lower your debt-to-income ratio is, the better your chances of getting a loan.

Debt-to-Income Ratio Calculation

Wondering how to calculate debt-to-income ratio for a personal loan or an unconventional personal loan? Start by adding up all your monthly expenses. These include:

Rent or mortgage payment
Credit card bills (use the minimum required payment)
Child support/alimony
Car payment
Student loan payments

Your DTI does not include utility bills, cell phone bills, insurance bills, or internet bills.Next, add up your monthly income. This may be just your monthly salary, but it could also include tips, child support payments or alimony, rental income, or a pension.Let’s say your monthly expenses add up to $2,000 per month, and you have $3,500 of income per month.Divide your monthly debt by your monthly income and convert it to a percentage. For our example, that would be:2,000/3,500 = .57 or 57% DTIWhen you’re looking for a personal loan, you may come across a loan based on income or ones that require a certain debt-to-income ratio. That’s why it’s wise to calculate your debt-to-income ratio for personal loans before you apply.

Can You Get a Personal Loan With a High Debt-to-Income Ratio?

When it comes to qualifying for a personal loan, start by finding out what kind of debt-to-income ratio you need to get approved. Lenders typically look for a DTI under 36%. If your DTI is high, it means you have a large amount of debt relative to your income, and you pose a greater risk as a borrower. There are numerous personal loan uses you may be interested in. But first, you’ll want to know, what is an acceptable debt-to-income ratio for personal loans? Here’s a look at how lenders see your DTI.

Debt-to-Income Ratio	How It Rates
35% or lower	Good
36% to 49%	Okay
50% or higher	Bad

A good DTI means you can pay your current debt and have money left afterward. You should have no trouble qualifying for a personal loan with a good DTI. A DTI that’s okay means you can manage your current debt, but you could run into financial problems, especially if an unexpected expense arises. You may have trouble qualifying for a loan with an okay DTI from certain lenders. A bad DTI indicates you likely can’t afford to take on any more debt, and you may have a difficult time getting approved for a loan. And while it could be possible to find a personal loan with a high debt-to-income ratio, you may have to pay a higher interest rate.

What Does a High Debt-to-Income Ratio Tell Personal Loan Lenders?

Your DTI can be an indicator of how much of a risk a lender might be taking by lending you money. A high debt-to-income ratio means you have more debt relative to your income. Therefore, there could be a high risk of you not being able to pay off additional debt, like a loan.

Is It Possible to Lower Your Debt-to-Income Ratio?

You can lower your debt-to-income ratio, which may help you get approved for personal loans and qualify for better rates. Lowering your DTI might also help your credit, which is another factor lenders consider.

Tips to Lower Your Debt-to-Income Ratio

The following steps could help you lower your debt-to-income ratio: Pay down your debt. Increase your monthly payments on your credit card bills rather than paying just the minimum amount. This will help you pay down your debt faster. You could also consider refinancing a car loan to one with a lower interest rate.Boost your income. That might mean taking on a side hustle like tutoring or doing freelance work to bring in some additional money.Make a budget and follow it. Establishing a budget can help you keep your spending on track. Make a list of your expenses and allocate the money you need to pay for them. Be financially responsible. For instance, when you’re ready to apply for a loan, and you’re considering the maximum personal loan amount to take out, be sure to borrow only what you can afford to pay back.

The Takeaway

Your debt-to-income ratio provides a snapshot of your financial status, and how likely you are to pay your debt. Lenders look at your DTI to get a sense of your creditworthiness and how risky it might be to lend you money, such as a personal loan. Generally, the lower your DTI, the better your chances of qualifying for a loan and getting a good interest rate. However, if your DTI is high, there are methods that may help you lower it, which could improve your finances as well as your options for borrowing money.

3 Personal Loan Tips

Personal loan interest rates vary from lender to lender, but generally depend on your credit score. With one online application, Lantern by SoFi makes it easy to find and compare the personal loan interest rates that you qualify for.
Read lender reviews before taking out a personal loan. You’ll get a sense of how long it can take to receive the funds and how good the customer service is.
Don’t assume that if you have bad credit, you can’t get a personal loan. There are lenders who specialize in bad credit loans.

Frequently Asked Questions

What is an acceptable debt-to-income ratio for personal loans?

How can you calculate the debt-to-income ratio for personal loans?

What is a high debt-to-income ratio for personal loans?

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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