Debt-to-Income Ratio (DTI)

The debt-to-income ratio (DTI) is a key financial metric lenders use to assess a borrower’s ability to manage new debt. It is calculated by dividing the borrower’s total monthly debt obligations (such as credit card payments, mortgages, student loans, and existing car loans) by their gross monthly income, then multiplying by 100 to express it as a percentage.

A lower DTI indicates that the borrower has more income available relative to their debt, making them a safer risk for lenders. Higher DTIs suggest that a borrower may be overextended, raising the likelihood of default.

For auto loans, many lenders prefer a DTI below 40%, although exact thresholds vary by institution. Managing DTI is crucial not only for loan approval but also for securing favorable interest rates.

Reducing debt balances or increasing income can improve DTI, enhancing financial flexibility. Borrowers with high DTIs may need to provide a larger down payment, add a co-signer, or accept less favorable loan terms.

Ultimately, DTI provides a holistic measure of financial stability and is one of the most important metrics lenders evaluate during the underwriting process.