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What is a Debt to Income Ratio?

Debt to Income Ratio Explanation

The Debt to Income Ratio (DTI) is a financial measurement used by lenders to assess an individual’s or a company’s financial health. It compares the total monthly debt payments to the total monthly income. The ratio is expressed as a percentage and gives lenders an idea of how much of the borrower’s income is already committed to debt repayment, which in turn helps assess the borrower’s ability to take on and repay new debt.

To calculate DTI, you divide total monthly debt payments by gross monthly income. For example, if a trucker named Alex has a monthly income of $10,000 and monthly debt payments (including truck loan payments, credit card bills, and any other debts) totaling $4,000, Alex’s DTI would be calculated as follows:

DTI Calculation for Alex
Total Monthly Debt Payments $4,000
Gross Monthly Income $10,000
DTI ($4,000 / $10,000) * 100 = 40%

In this example, Alex’s DTI of 40% means that 40% of his monthly income is dedicated to debt payments, leaving 60% for other expenses. Generally, lenders prefer a DTI ratio of 36% or lower, though this can vary based on the lender and the type of loan. A lower DTI ratio indicates a better balance between debt and income, suggesting that the borrower is less risky and more likely to manage additional loan payments effectively. For truckers like Alex, maintaining a lower DTI ratio can be crucial for securing favorable terms on loans for business expansion, equipment financing, or operational expenses.

Obviously, DTI is not the only factor that is considered during the decision making process of lenders. There are several other factors like revenue, credit score (business & personal), type of loan sought etc. Nevertheless, the aim should always be to have as low a DTI as possible, preferably lower than 30%.

Learn more about how to lower your DTI.

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