Jargon Watch: Defining DTI
What is DTI? Is it the Department of Trade and Industry? No. What about Diffusion Tensor Imaging? Nope. It’s none of these. When it comes to Lending Club, DTI stands for Debt-to-Income ratio. This goes for the entire lending business. DTI is something that must be taken into account when making loans.
So what exactly is Debt-to-Income ratio? It is the percentage of a consumer’s monthly gross income that goes toward paying debts (excluding household debt). When DTI is displayed, it’s usually listed as a percentage, such as 8%: it means that 8% of the consumer’s monthly gross income goes toward paying debts. In general, a consumer with a DTI above 20% would be carrying a high debt load (relative to their income) while a consumer with a DTI below 10% would be carrying a relatively low debt load.
Lending Club uses DTI as part of its “risk modifiers” that help calculate a “loan grade” ranging from A1 to G5. The loan grade is mostly based on a consumer’s FICO score, but is modified to take into account the DTI and the loan amount. For example a Lending Club borrower with a 710 FICO score starts with a B1 loan grade. If that borrower has a 5% DTI, their loan grade will remain a B1. If they have a 15% DTI, their loan grade will become a B4, and they would pay a slightly higher interest rate as a result.
We do the best we can for our customers, borrowers and lenders. To read more about DTI please go right here.