What is a debt-to-income ratio and how does it affect loan approval?

Debt-to-income ratio (DTI) is one of the two main underwriting levers alongside credit score. Lenders calculate it by summing all recurring monthly debt obligations (minimum credit-card payments, auto loans, student-loan payments, existing personal loans, mortgage or rent if the lender includes it) and dividing by gross monthly income before taxes.

The resulting percentage tells the lender how much of each dollar you earn is already spoken for. A DTI of 35% means 35 cents of every gross dollar goes to existing debt, leaving 65 cents for the new payment plus living expenses.

Most personal-loan lenders set a hard cap at 40-45% DTI (including the proposed new payment). Prime lenders compete most aggressively for borrowers under 30%. High income can offset a higher DTI: a borrower with $200k income and 42% DTI may qualify where a borrower with $50k income and 42% DTI is declined.

To lower DTI before applying, pay down or close revolving accounts (this also raises your credit score) or pay off smaller installment balances. Increasing income is faster if you can document it with a recent pay raise or a new job offer letter.