Is Car Insurance Included in Debt-to-Income Ratio?

The Debt-to-Income (DTI) ratio is a financial metric lenders commonly use to assess a borrower’s ability to manage monthly payments and repay debts. It provides a snapshot of how much of an individual’s gross monthly income is allocated to recurring debt obligations. This article clarifies what constitutes debt within DTI calculations and addresses whether car insurance is included.

Understanding Debt-to-Income Ratio

The Debt-to-Income (DTI) ratio compares an individual’s total monthly debt payments to their gross monthly income. Gross monthly income is money earned before taxes and other deductions. The ratio is a percentage, calculated by dividing total monthly debt payments by gross monthly income and multiplying by 100. For instance, if monthly debt payments are $1,000 and gross monthly income is $4,000, the DTI ratio is 25%.

Lenders use the DTI ratio to evaluate a borrower’s financial health and capacity to take on additional debt. A lower DTI ratio indicates healthier financial standing, suggesting sufficient income remains after covering existing debt obligations. While standards vary, a DTI ratio below 36% is often favorable, though some may approve loans with ratios up to 43% or higher, depending on the loan type.

What is Included in DTI Calculations

Lenders primarily focus on recurring monthly debt payments when calculating the Debt-to-Income ratio. These are obligations to repay borrowed money over time. Common examples include monthly mortgage payments or rent.

Other typical debts in DTI calculations are car loan payments, student loan payments, and minimum credit card payments. Payments for personal loans, co-signed loans, and IRS installment agreements are also included. These items are considered debt because they involve a contractual agreement to repay a borrowed amount, distinguishing them from everyday living expenses.

What is Not Included in DTI Calculations

Many regular monthly expenses are not factored into Debt-to-Income (DTI) ratio calculations. These are considered operating costs of a household rather than debt obligations. Excluded expenses include utility bills, groceries, transportation costs, entertainment, and subscriptions.

Health insurance premiums are another recurring cost that does not count towards DTI. Car insurance premiums also fall into this category of excluded expenses, as they are a recurring cost for a service rather than a repayment of borrowed money.

Why Car Insurance is Not Part of DTI

The Debt-to-Income ratio assesses an individual’s capacity to manage and repay borrowed money, not their overall cost of living. The distinction lies between “debt” and “expense.” Debt refers to money owed and repaid over time, such as a loan.

An expense is a cost for goods or services, like a monthly insurance premium. Car insurance does not represent a loan or a borrowed sum that needs to be repaid. DTI ratios measure the portion of income committed to financial obligations tied to credit, ensuring a borrower’s ability to handle new or existing credit responsibilities.