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Debt to Income Ratio

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Mark Cappel
UpdatedJun 26, 2007
Key Takeaways:
  • Debt to Income Ratio and be the difference between getting a loan or getting declined. If you get your loan, a high DTI could guarantee high interest rates and fees. Let help you analyze and save your debt to income ratio
What is the maximum debt to income ratio one can have when getting a loan.

What is the maximum debt to income ratio one can have when getting a loan.

Your debt-to-income ratio, or DTI, is a comparison of your monthly take-home income and your monthly repayment obligations to creditors. For example, if you bring home $2000 each month and your debt payments total $500, your DTI would be 25%. When you apply for new credit, potential lenders look at your DTI to determine if you can realistically afford your current debt payments, and if so, how much additional debt you can afford to repay. DTI is one of the most important factors considered by potential lenders, as it is a good indication of your ability to repay the new loan.

Every lender determines its own guidelines regarding allowable DTI ratios for new loans, so I cannot provide an absolute maximum as you request in your question. Generally speaking, a DTI over 55% is considered very risky, and could make obtaining a new loan difficult. Some lenders may extend you credit even if your after loan DTI is above 55%, but the interest rate they charge will be significantly higher than the rate paid by borrowers who pose less credit risk. If your after-loan DTI is 25% or less, it should cause you few problems. However, it you are pushing 45% or 50%, you may start to have problems trying to obtain your new loan. Since lenders want to see if you will be able to meet you monthly payments after they lend you money, not if you are able to meet your current payments, most lenders will review both your pre-loan and post-loan DTI ratios to determine if this new loan will push you over the financial brink.

Before you go shopping for a new car, you should consider how much more you can afford to pay to your creditors on a monthly basis. While shopping, you will receive many different credit offers with different interest rates and monthly payment amounts. If a new payment amount will push you DTI above 55%, you may be overextending yourself financially, and you may not want to proceed with the purchase. Basically, you need to know what you can afford-if your DTI is above a lenders allowable limit, you may be trying to borrow more money than you can realistically afford to repay.

I invite you to learn more about debt to income ratios.

I wish you the best of luck in your search for a new car. I hope the information I have provided helps you Find. Learn. Save.