How to Improve Your Debt-to-Income Ratio for a Personal Loan

If you have plans to borrow money, your debt-to-income (DTI) ratio matters. Learn how lenders use it and how you can improve it.
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Written by:
Anna Baluch
Edited by:
Kristin Marino verified

If you have plans to get a personal loan or another type of loan, your debt-to-income (DTI) ratio is important. It can help lenders determine whether to extend you a loan.

As a general rule of thumb, the lower your DTI, the more likely you are to lock in a loan with low rates and favorable terms.

Here’s everything you need to know about your DTI and how to improve it.

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What Is a Debt-to-Income Ratio?

Often called DTI, your debt-to-income ratio explains how much of your gross income goes toward your debt payments every month. It shows lenders how much more debt you can comfortably take on based on your current income and debt situation.

There are two types of DTI.

Front-end DTI

Front DTI only accounts for your monthly housing expenses and how they relate to your gross income. These housing costs may be your monthly rent payments or your monthly mortgage payments as well as property taxes and homeowners insurance.

Back-end DTI

Back DTI includes all your monthly debt payments in addition to your housing expenses, including car loans, student loans, student loans, and credit card payments.

The higher your DTI, the riskier of a borrower you are in a lender’s eyes. If your DTI is too high, a lender might charge you a higher interest rate or even deny your request for a loan.

How to Figure Out Your DTI Ratio

Follow these steps to calculate your DTI.

Step 1: Add Up Your Monthly Payments

These should be your recurring minimum monthly payments, including your rent or mortgage payment, car loan payment, student loan payment, credit card payment, and personal loan payment.

Be sure to include utility costs, health insurance premiums, transportation expenses, retirement contributions, and food costs.

Step 2: Divide Your Monthly Payments by Your Gross Monthly Income

Your gross monthly income is how much you earn pre-taxes each month.

If you share money with a spouse, for example, their gross monthly income can be included as well.

You can consider all sources of income, such as wages, salaries, tips and bonuses, pensions, Social Security, child support and alimony, and any other additional income.

Divide the total of your minimum monthly payments by your total gross monthly income.

Step 3: Convert to a Percentage

To get your DTI in percentage form, multiply the figure you calculated in step two by 100.

DTI Calculation Example

Let’s say your monthly bills look like this:

  • Rent: $1,000
  • Car loan: $250
  • Student loan: $500

Your recurring minimum monthly payments add up to $1,750.

Your gross monthly income before taxes is $5,000.

In this case, your DTI is $1,750/$5,000= 0.35.

To convert this decimal into a percentage, multiply by 100 and you’ll get 35%.

Your DTI is 35%, which means you’re in great shape and should qualify for all types of loans easily.

Compare loans, get the best rates, and find a lender that will work with your DTI.

How Does the DTI Work?

There are several reasons why your DTI is important, including the following.

You Need a Low DTI to Buy a House or Car

A house or a car is a large purchase.

You’ll probably need a mortgage or car loan to buy them. If you do, lenders will look at your DTI to determine how much of your monthly income goes to debt payments and whether you can afford another loan.

Most mortgage lenders like to see a DTI of no higher than 43% but you might still get approved with a higher interest rate if your DTI exceeds this threshold.

Your DTI Impacts Your Ability to Get a Personal Loan

Personal loan lenders, just like lenders who offer mortgages and car loans, are also concerned with your DTI.

If it’s too high, you may have to apply for a personal loan with a cosigner or opt for a secured loan.

You May Have a Hard Time Paying Your Bills

You may have a difficult time covering your monthly bills with a high DTI.

Even if you can make them, you won’t have much wiggle room in your budget and might struggle if an unexpected expense like a car repair or medical bill pops up.

What Does Your Ratio Mean?

Here’s an overview of what your DTI might mean.

Your DTI and How It Affects Getting a Personal Loan

If you apply for a personal loan, a lender will likely pay attention to your DTI because a high DTI might indicate you’ll have trouble making your payments.

On the other hand, a low DTI may reassure them that you’ll be a responsible borrower and that lending to you is a good idea.

While DTI requirements vary from lender to lender, most prefer a DTI of 36% or below.

There are some lenders with more lenient criteria who may lend to you with a DTI of 50% or more. Just be prepared to pay higher rates that increase your overall cost of borrowing.

The lower your DTI, the more opportunities you’ll have for personal loans with favorable rates and terms.

How You Can Lower Your DTI Ratio

If your DTI is too high, these strategies can help you lower it.

Reduce Your Expenses

The lower your expenses are, the more money you’ll have to put toward debt.

To cut down on your monthly expenses, eat at home instead of dining out, cancel streaming services or gym memberships you no longer use, shop for a cheaper phone plan, use coupons while you grocery shop, downsize to a smaller house or apartment, and find free entertainment options.

Increase Your Income

A higher income will make it easier for you to reduce your debt levels.

If you don’t earn enough at your full-time job, pick up a side hustle or part-time gig. You can deliver food, tutor, babysit, or sell crafts for some extra cash.

Consolidate Debt

When you consolidate debt with a personal loan or balance transfer credit card, you roll multiple debt payments into a single loan with one, manageable monthly payment.

Debt consolidation can give you the chance to land a lower interest rate and repay your balances sooner so you can bring down your DTI.

Postpone Large Purchases

If you’d like to buy something expensive like a television or couch, for example, save for a larger down payment.

Delaying your purchase means you’ll need less credit, which can, in turn, keep your debt-to-income ratio low.

Create a Budget

A budget is a spending plan based on your income and expenses.

It can help you keep your debt payments low and stay on track financially. While there are many types of budgets you can choose from, the most popular options include the pay-yourself-first budget, zero-sum budget, 50/30/20 budget, and envelope budget.

Pay More Than the Minimum

If possible, pay more than the minimum payments on your credit cards and loans.

Even if you do this very often when you have a month of lower expenses or higher income, you’ll be able to rescue debt faster.

Choose the Right Debt Payoff Strategy

There are many debt payoff strategies that can help you lower your DTI. The debt snowball focuses on paying your smallest debts first while the debt avalanche prioritizes your debts with the highest interest rates.


How do I calculate my DTI?

To calculate your DTI, divide your total monthly debt payments by your total gross income. Then, multiply by 100 to convert your answer to a percentage.

Is all debt treated the same in my DTI?

All debt will contribute to your DTI in the same way. It doesn’t matter if it’s a mortgage, car loan, or personal loan. The more debt you have, the higher your DTI, and the more difficult it will be for you to qualify for financing.

What payments should I not include in my DTI?

Not all payments belong in your DTI calculator. Be sure to avoid monthly utilities, like electricity or water, car insurance expenses, cell phone bills, health insurance costs, and groceries, food, and entertainment expenses.

How quickly can I improve my DTI?

The total amount of debt you have at any given time will determine your DTI. That’s why you can improve it right away by paying down debt. It won’t take long for your hard work to pay off.

Does my DTI impact my credit score?

Your DTI does not have a direct effect on your DTI. Instead, it shows how much of your monthly income goes to debt repayments each month. A high DTI doesn’t necessarily translate to a low credit score, as long as you’re making your minimum monthly payments.

What is a good DTI?

Lenders have their own unique criteria for DTI. In their eyes, the lower your DTI, the better. Most mortgage lenders look for a DTI of 43% or less while most personal loan lenders prefer a DTI of 36% or less. A DTI of 50% or higher will limit your options.

What is the difference between DTI and credit utilization?

Your DTI compares how much debt you owe each month to how much you earn. Credit utilization, however, shows how much of your available credit you’re using. Your goal should be to keep both your DTI and credit utilization as low as possible.

Is my DTI too high?

The lower your DTI, the better financial shape you’re in.

If your DTI is lower than 36% and you don’t have negative information on your credit report, you’re doing great. Lenders will likely approve you for all types of loans with attractive rates. If it’s on the higher side, it’s time to lower it. By doing so, you can open the doors to low rates and favorable rates in the future.