Before a lender approves your car loan or personal loan, they want to know one thing above all else: can you comfortably manage the repayments given everything else you already owe?
That’s what the debt to income ratio measures. It’s one of the most important numbers in any loan application, and yet most borrowers have never calculated their own. Understanding where you stand before you apply puts you in a much stronger position, whether you’re financing a new car, consolidating debt, or taking out a personal loan for a renovation or medical expense.
What Is a Debt to Income Ratio?
A debt to income ratio (DTI) is a simple formula that compares the total amount of debt you hold to your gross annual income before tax. The result tells a lender how much of your earning capacity is already committed to existing debt.
The formula is straightforward:
DTI = Total Debt / Gross Annual Income
So if you earn $90,000 per year and hold $180,000 in total debt across a car loan, a personal loan, and credit card limits, your DTI is 2.0. That means you owe twice your annual income, which most Australian lenders would consider a manageable position. In Australia, a DTI of 3 or below is generally viewed favourably. A ratio above 6 is considered high risk by most lenders, and from February 2026, APRA introduced formal limits restricting banks from allocating more than 20% of new lending to borrowers with a DTI of 6 or above.
How to Calculate Your Debt to Income Ratio
Calculating your own DTI takes about five minutes. Here’s how to do it.
Step 1: Add up your gross annual income. Include your salary before tax, plus any regular additional income such as overtime, bonuses, rental income, or commission. Use the gross figure, not your take-home pay.
Step 2: List all your current debts. This is where most people underestimate their position. Lenders include:
- Car loans and personal loans (the outstanding balance)
- Credit card limits (the full limit, not just the balance you carry)
- Buy now, pay later accounts
- Any other loans or finance arrangements
Step 3: Divide total debt by gross annual income. The result is your DTI ratio.
Here’s a worked example:
| Income / Debt Item | Amount |
|---|---|
| Gross annual salary | $95,000 |
| Car loan balance | $22,000 |
| Personal loan balance | $8,000 |
| Credit card limit | $10,000 |
| Total debt | $40,000 |
| DTI ratio | 0.42 |
In this example, the borrower owes less than half their annual income. Most lenders would consider this a clean DTI position. Here’s how different ratios tend to be read in practice:
| DTI Ratio | What It Generally Means |
|---|---|
| Under 1.0 | Strong position, well within most lender criteria |
| 1.0 to 3.0 | Manageable, broadly acceptable across most lenders |
| 3.0 to 5.0 | Moderate, lenders will assess carefully |
| 5.0 to 6.0 | High, some lenders may require justification |
| Above 6.0 | Considered high risk by most Australian banks |
These are indicative benchmarks. Non-bank lenders on the Yes Loans panel are not subject to the same APRA-imposed DTI cap and may assess applications with more flexibility. That panel diversity is part of how we work harder to say yes more often.
How Much Can I Borrow? What Your DTI Tells a Lender
DTI is one input among several that lenders use to assess borrowing capacity. It works alongside a serviceability assessment, which looks at your net monthly income after expenses and existing debt repayments, and asks: can this person meet the new repayment on top of everything else they’re currently paying?
For car loans, lenders typically cap vehicle finance at around one to two times your gross annual income, though this varies by lender and application strength. A borrower earning $80,000 might be approved for a car loan of between $40,000 and $80,000, provided their DTI, expenses, and credit history all stack up.
For personal loans, the assessment focuses more on your net monthly surplus after living costs and existing repayments. A strong income with low existing debt gives a lender confidence that a new personal loan repayment is comfortably within reach.
Does DTI work differently for car loans vs. personal loans?
Not fundamentally. Both are assessed on your overall debt position and repayment capacity. The key difference is that a secured car loan uses the vehicle as collateral, which reduces lender risk and can result in a more favourable rate even if your DTI is on the higher side. An unsecured personal loan carries more risk for the lender, so a clean DTI carries more weight.
Use the Yes Loans loan calculator to model what a new repayment would look like at different loan amounts and terms before you apply.
What Counts as Debt in Your DTI Calculation?
This is where borrowers most often misjudge their own position. Lenders don’t just look at debts you’re actively repaying. They assess your total liability exposure, which includes commitments you may not think of as debt.
What most lenders include in your DTI:
- Outstanding loan balances: car loans, personal loans, any other fixed-term finance
- Full credit card limits: not the balance you carry, but the maximum you could draw. A $15,000 credit card limit you rarely use still counts as $15,000 of debt in the assessment
- Buy now, pay later balances and limits: most major lenders now include BNPL as a liability
- HECS-HELP debt: not always included in the official DTI calculation, but lenders typically factor in your annual compulsory repayment as a monthly liability that reduces your borrowing capacity
Does my credit card limit affect my DTI even if I don’t use it?
Yes, and this surprises a lot of people. Lenders apply an assumed monthly repayment against your total credit card limit, typically around 3% per month. A $20,000 card limit you never touch still reduces your assessed borrowing capacity. Cancelling or reducing unused credit limits before you apply is one of the quickest ways to improve your position.
How to Improve Your Borrowing Capacity Before You Apply
If your DTI ratio is higher than you’d like, there are practical steps you can take before lodging an application. Each one shifts the ratio in your favour.
- Cancel or reduce unused credit card limits. This is the fastest lever. Even cutting a $10,000 limit down to $3,000 removes $7,000 of assessed debt from your DTI.
- Pay down existing loan balances. Reducing the outstanding balance on a personal loan or car finance commitment directly lowers your total debt figure. Even a partial paydown helps.
- Consolidate multiple debts into one. A debt consolidation loan can roll several separate repayments into a single lower-rate loan. It doesn’t eliminate the debt, but it can simplify the picture and sometimes reduce the total monthly commitment, which improves serviceability.
- Document all sources of income. Gross income is the denominator in the DTI formula. If you have rental income, freelance work, overtime, or regular bonuses that aren’t reflected in a standard payslip, make sure these are properly documented. Every extra dollar of verified income improves your ratio.
- Avoid new credit applications in the lead-up. Each credit application leaves an enquiry on your file. Multiple enquiries in a short period signal risk to lenders and can temporarily reduce your credit score, which affects the rate you’re offered.
- Work through a broker, not multiple direct lenders. A broker submits one application across a panel of lenders, protecting your credit file while identifying which lender is most likely to approve your application at the best rate. At Yes Loans, our panel includes Angle Finance, Latitude Financial, Sovereign Credit, Pepper Money, Money3, and Allied Credit, and each has different credit criteria. We match your profile to the right fit, not the nearest available option.
Key Takeaways
- The debt to income ratio is your total debt divided by your gross annual income. Lenders use it to assess how much additional borrowing you can comfortably service
- A DTI under 3.0 is generally considered manageable. Above 6.0 is viewed as high risk by most Australian banks
- Full credit card limits, not just balances, count as debt in the assessment. Unused limits still reduce your borrowing capacity
- For car loans, lenders typically consider up to one to two times your annual income as a guide. Serviceability, credit score, and expenses all feed in alongside DTI
- Cancelling unused credit limits, paying down balances, and documenting all income are the fastest ways to improve your position before you apply
- Non-bank lenders on Yes Loans’ panel are not subject to APRA’s DTI cap and may assess applications with greater flexibility than a mainstream bank
Ready to find out where you stand? Chat to one of our brokers on (08) 9472 3000, check your car loan options, or apply online and we’ll take a look at your full picture across our lender panel.
Yes Loans is an Australian Credit Licensed finance broker (ACL 392426). Credit is subject to lender approval and responsible lending assessment. This article is general information only and does not constitute financial advice.
