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Debt-to-Income Ratio

Debt-to-Income Ratio (DTI) is a financial metric that compares a consumer’s total monthly debt obligations to their gross monthly income. It expresses, as a percentage, how much of a person’s income is already committed to paying existing debt. 

In automotive lending, a lender uses the DTI ratio to determine whether a customer can reasonably afford the proposed vehicle loan in addition to their other financial obligations.

Purpose of Debt-to-Income Ratio

When evaluating a new retail installment contract, lenders must identify whether the customer is willing to pay, and more importantly, whether they can pay based on current income and obligations. The Debt-to-Income Ratio provides an objective measure of financial capacity and risk, allowing both lenders and dealerships to structure the transaction responsibly.

  • Assess a customer’s financial capacity to handle additional debt
  • Reduce the lender’s risk of default
  • Ensure the customer is protected from overextension
  • Help dealerships structure deals that meet lender approval guidelines

DTI is often used alongside credit score, employment history, and loan-to-value (LTV) ratio to approve or decline loan applications.

How is Debt-to-Income Ratio Calculated?

DTI is calculated using verified income and total recurring monthly debt. It is most meaningful when all liabilities are accurately disclosed and documented. While threshold limits may vary by lender, the general principle is the same: the higher the DTI, the greater the likelihood of future payment stress or default.

DTI (%) = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100

“Total Monthly Debt Payments” include:

  • Mortgage or rent
  • Credit card minimum payments
  • Student loan payments
  • Existing auto or personal loan payments

“Gross Monthly Income” is the customer’s income before taxes or deductions.

Example: 

Total Monthly Debt = $2,000Gross Monthly Income = $5,500

DTI = (2,000 ÷ 5,500) × 100 = 36.3%

Most lenders prefer a DTI below 45%, though the exact threshold varies by lender and credit tier.

Importance Of Debt-to-Income Ratio

DTI is important because: 

  • It helps F&I managers determine which lenders are likely to approve the customer
  • It influences the structure of the deal (term length, cash down requirement)
  • It prevents last-minute funding declines due to affordability concerns
  • It protects customers from loans they may not be able to sustain

Without considering DTI during deal structuring, the dealership could waste time building a deal that the lender ultimately rejects.

Consider this scenario: A customer applies for financing with $1,450 in existing monthly debt and wants to add a $550 car payment. With a gross monthly income of $4,750, their new total monthly debt would be $2,000, resulting in a DTI of 42.1%. If the lender’s maximum DTI is 40%, the deal may be declined unless the F&I manager restructures it by extending the term or requesting additional cash down to lower the payment.

This illustrates why reviewing DTI upfront is essential. It not only saves the dealership time but also ensures the customer receives financing that aligns with lender requirements and their financial capacity. 

Common Challenges When Using DTI in Deal Structuring

While the Debt-to-Income (DTI) ratio is a straightforward calculation, its value depends heavily on accurate customer information and each lender’s underwriting criteria. Dealerships must take care in how they collect, verify, and apply this data to avoid delays, rejected applications, or unsustainable deals.

  • Accurate Debt Reporting: Customers may unintentionally or deliberately omit certain debts, resulting in inaccurate DTI calculations and potential deal rejections.
  • Lender Thresholds Differ: Some lenders cap DTI at 40%, while others may allow up to 50%, making it essential for F&I managers to match the right lender to the right customer.
  • Income Verification: Gross income should be verified with recent pay stubs, tax returns, or other documentation to ensure the calculation reflects reality.
  • Term Manipulation: Extending loan terms lowers the monthly payment and DTI ratio but significantly increases total interest costs, which must be considered carefully.
  • Customer Education: Many customers don’t understand how DTI influences their approval odds; clear explanations build trust and help manage expectations. 

By factoring DTI into financing discussions early, dealerships align deals with lender requirements while also protecting customers from loans that may strain their financial stability.

Join ATN’s training and learn how to structure smarter, faster, and more profitable deals with confidence.