Debt-to-income ratio

The debt-to-income ratio (DTI) is the proportion of a borrower's gross monthly income that goes to servicing debt, expressed as a percentage. A DTI of 40% means forty out of every hundred units earned are already committed to loan repayments before anything else is paid.

DTI is an affordability measure. It asks whether the borrower can carry the repayment, which is a different question from whether the lender can recover if they cannot — that is the job of the loan-to-value ratio and the security position. Nearly every lending policy uses both, because the two failures are independent: a well-secured loan can still be unaffordable, and an affordable loan can still be badly secured.

The ratio is also called the debt service ratio (DSR) or debt burden ratio, and in payroll lending the deduction ratio. The arithmetic is the same; the differences lie in what each institution counts as debt and as income, and those definitional choices matter more than the threshold itself.

The DTI formula

DTI = (Total monthly debt repayments ÷ Gross monthly income) × 100

The proposed new loan's repayment is included in the numerator. A DTI calculated without it describes the borrower's position today, not the position the lender is being asked to create.

Front-end and back-end DTI

• Front-end DTI: Covers housing costs only (rent or mortgage, plus rates, levies, and insurance where applicable). Typically used in mortgage lending, where housing burden is assessed separately.
• Back-end DTI: Covers all debt repayments including housing. This is the general-purpose figure; "DTI" without qualification usually means this.

Front-end ratios are a mortgage convention and add little in unsecured or business lending, where the useful split is between debt and non-debt commitments rather than between housing and everything else.

What counts in the numerator

Include every contractual monthly obligation the borrower is committed to:

• Instalments on all existing loans — bank, microfinance, digital, asset finance, informal where it can be established
• The proposed repayment on the loan under assessment
• Minimum payments on revolving credit and overdrafts
• Hire purchase and lease payments
• Court-ordered maintenance and judgement debt orders
• Payroll deductions of a debt nature, including employer and sacco loans
• Guarantees the borrower has given that are already being called

Exclude non-debt living costs — food, transport, school fees, utilities, insurance premiums. These matter enormously to affordability, but DTI is not the tool that captures them, which is the ratio's central weakness and the subject of the section below.

Balloon and interest-only structures distort the numerator. A facility with low payments now and a large payment later shows a flattering DTI throughout its life and an unpayable one at maturity. Assessing such loans on a fully amortising equivalent repayment is the standard correction.

What counts in the denominator

Gross income before tax and statutory deductions, from sources that are verifiable and reasonably durable:

• Salary and regular allowances, evidenced by payslips and bank credits
• Net business income, established through loan appraisal rather than assertion
• Rental income, discounted for vacancy and collection risk
• Pension and annuity income
• A co-borrower's income, where they are formally a party to the loan

Treat with care: one-off bonuses, overtime that is not contractual, commission in a first year, income from a source that also employs the co-borrower, and any income that cannot be traced to a bank or mobile money record.

Worked example

An applicant earns 12,000 gross per month and requests a loan requiring a repayment of 2,000.

• Vehicle loan: 1,800
• Credit card minimum: 400
• Digital loan: 300
• Existing total: 2,500
• Proposed new loan: 2,000
• Total debt service: 4,500

DTI = (4,500 ÷ 12,000) × 100 = 37.5%

Against a 40% policy cap, this application passes.

Why 37.5% can still be unaffordable

Now look at the same borrower's actual cash position:

• Gross monthly income: 12,000
• Tax and statutory deductions: (2,200)
• Net income: 9,800
• Household essentials (food, rent, transport, school fees, utilities): (5,500)
• Available for debt service: 4,300
• Required debt service: (4,500)
• Shortfall: (200)

The borrower passes the ratio and fails the arithmetic. This is not an edge case — it is the predictable result of applying a percentage-of-gross-income test to borrowers whose subsistence costs consume most of their income.

The distortion is a function of income level. Compare two borrowers at identical DTI:

Lower-income borrower:

• Gross income: 12,000
• DTI: 37.5% (Debt service: 4,500)
• Net income after deductions: 9,800
• Household essentials: (5,500)
• Available for debt service: 4,300
• Position: Shortfall of (200)

Higher-income borrower:

• Gross income: 60,000
• DTI: 37.5% (Debt service: 22,500)
• Net income after deductions: 45,000
• Household essentials: (12,000)
• Available for debt service: 33,000
• Position: Surplus of 10,500

Essential costs do not scale with income. The same ratio therefore describes comfort at one income level and distress at another, and DTI thresholds imported from high-income consumer markets are systematically too loose when applied at the bottom of the income distribution.

The residual income method

The correction is to test surplus rather than proportion:

Available surplus = Net income − Essential living costs − Existing debt service

Approve where the surplus covers the proposed repayment with a defined margin — commonly by capping debt service at 50% to 70% of surplus rather than at a percentage of gross income. This is the method that underlies the affordability arithmetic in micro and small business lending, where household and business finances are a single pocket and a gross-income ratio has almost no informational content.

Many lenders run both: DTI as a fast screen, residual income as the binding test. Where the two disagree, the residual figure is the one describing whether the money exists.

Typical thresholds

Caps vary by lender, product and jurisdiction, and several markets set them in regulation. The ranges below are indicative of common practice rather than universal rules.

• Below 30%: Comfortable; room for further borrowing.
• 30%–40%: Standard approval territory for most products.
• 40%–50%: Approval usually requires compensating strengths (strong security, long relationship, verified stable income).
• Above 50%: Declined by most lenders; treated as an over-indebtedness indicator.

Two structural qualifiers:

Secured lending tolerates higher ratios than unsecured. A mortgage at 45% DTI and an unsecured personal loan at 45% carry different expected losses, because the recovery position differs.

Payroll lending is often capped by law, not policy. Many jurisdictions limit total deductions from an employee's salary — frequently expressed as a maximum proportion of basic pay or a minimum take-home amount that must survive all deductions. Where such a rule exists it overrides internal policy and applies at the level of the payslip, meaning a lender must know the borrower's other deductions before it can lawfully add its own. Confirm the current rule for your jurisdiction; these limits are amended more often than most lending policies are updated.

DTI compared with other lending ratios

• DTI: Compares debt repayments to income. Answers: Can the borrower afford this?
• Residual income / surplus: Compares debt repayments to income after living costs. Answers: Does the money actually exist?
• LTV: Compares loan to collateral value. Answers: How much is recovered if they cannot pay?
• DSCR: Compares business cash flow to debt service. Answers: Can the business afford this?
• LTI: Compares total loan to annual income. Answers: Is the borrower over-leveraged overall?

DSCR is the business analogue of DTI and is usually expressed as a multiple rather than a percentage — a DSCR of 1.25 means cash flow covers debt service 1.25 times over. Where a borrower's income comes from a business they own, both measures are in play and should agree.

The blind spot: debt the lender cannot see

DTI is only as accurate as the numerator, and the numerator is routinely incomplete.

Informal borrowing does not appear anywhere. Money owed to family, employers, savings groups, shopkeepers and informal lenders carries real repayment pressure and no documentary trail.

Not every lender reports. Where digital and unregulated lenders are outside the credit bureau framework, a borrower can hold several active loans that no search will reveal.

Reporting lags. A loan taken last week may not appear for weeks. Applicants who apply to several lenders in a short window exploit this, deliberately or otherwise.

Guarantees are contingent, not current. A borrower guaranteeing several sacco loans has an exposure that DTI ignores until it crystallises, at which point it arrives all at once.

Practical countermeasures: bank and mobile money statement analysis to identify repayment patterns to lenders that did not appear on the bureau report; direct questions about informal obligations, asked as normal rather than as an accusation; a conservative margin between the calculated ratio and the policy cap; and re-checking the bureau immediately before disbursement on larger loans rather than only at application.

Where DTI goes wrong

Gross income used for low-income borrowers. The single largest source of overstated affordability, for the reasons set out above.

The new loan omitted from the numerator. Produces a ratio describing a position that will not exist once the loan is written.

Income that is not durable. Overtime, commission, seasonal earnings and a single strong month treated as permanent.

Household expenses assumed rather than asked. A standard deduction applied to every applicant regardless of household size, dependants or school-fee cycle.

Refinancing counted twice, or not at all. Where the new loan settles an existing one, the old repayment should come out of the numerator — but only if settlement is a condition of disbursement and is actually enforced.

The ratio calculated once and never again. A borrower's DTI at origination says nothing about their position two years later, after three more loans elsewhere. For revolving facilities and top-up decisions, the figure needs refreshing.

Treating the threshold as the test. A cap is a boundary, not an assessment. Loans that clear the ratio still fail, and the appraisal is what catches them.