Debt-to-Income Ratio ~ an expected future outcome

Aug 11, 2021

What is debt-to-income

A percentage of how much money you spend on debt payments every month vs. how much you make every month. This number determines your capability of being able to pay back a loan.

They are basically trying to determine a future outcome with a promise of your future income. 

I believe it is difficult to calculate a person’s future windfalls or failures simply based on scores. Everyone faces an unfavorable fate with completely different characteristics, it is never as simple as a number. That is where knowing and speaking with community lenders who care about the individual really makes the difference.

 

With average auto loan balances on the rise it is important to know how much you can afford to spend on a vehicle purchase. Always be clear on the terms of your loan and how much you will be paying in interest over the length of the loan.

Why I need to know

Your DTI is not something found on a credit report nor does it effect it but it is a number needed to obtain credit from a lender.

It will also give you a full picture of your debt service and perhaps let you revise your current financial picture. Perhaps this is a perfect time to prepare a debt payoff strategy to strengthen your purchasing power and get your debt in check.

What does my ratio mean

This ratio is an indicator of your capability to pay back your debt, loans, etc., as well as take on any new debt you may be seeking. It’s an insight of your all around financial health.

The lenders are the bookies and they are placing the odds of you paying back your debt. The lower your odds (the more likely you are to win) the lower your interest rate, the higher your odds (meaning more unlikely to win)  the higher your rate. So they’re betting on you to win (super-prime), place (prime), or show (subprime).

The lenders make more off of the subprime market then the prime and super-prime so the higher the risk the higher the reward.

Auto Loan Fact: Loans on used cars to borrowers with subprime credit scores paid lenders more than 9 percent, compared with 5 percent or less for used car buyers with solid credit, according to data from credit bureau Experian.

If you are in the subprime/prime category it is crucial you understand all of the terms of any loan before you ever make a deal. Borrowers that fall into this group are usually the most vulnerable to predatory lending. 

Purchasing Power 

With all of that said it is important to have purchasing power, control of your debt, and a growing healthy financial existence.

To calculate your DTI, divide your total monthly debt payments by your pre-tax income and then multiply it by 100.

Ex: Total monthly debt payments $1,700 and pre-tax income is $4,500 

$1,700 ÷ $4,500 x 100 =  37.8% 

These DTI percentages will vary from lender to lender however a good DTI is 36% and anything over 50% means you should consider paying down some debt.

You will want to go over your current budget, credit score, loans and the rates associated with all of them BEFORE you even think of making a car purchase. 

This will give you the power to know exactly what you have, how much you can spend and the rate at which you will pay for any future credit. 

Your credit worthiness depends on DTI ratios and other factors so always do a quarterly check on your budget and see where you are wasting money and adjust or pivot to meet your money goals for today and the future. 

Remember to always bet on yourself and nothing will stop you from winning.

If you want to know exactly how to get your DTI ratio and are serious about budgeting for your next car purchase then definitely check out these worksheets!

All my best,
Lori DiPasquale
CEO & Founder
TitleKeyCash.com & Girls Guide to Car Buying 
Become a Crazy Confident Car Buyer 

 

 

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