Debt to Income (DTI) is one of the most important pieces of Credit Analysis that we need to learn in order to reduce our risk in investing in P2P Loans. My own Credit Analysis experience led to the development of my own Credit Scoring system and one of the most important factors is Debt to Income.
Debt to Income shows us how much of our borrower's monthly income goes towards paying debts so if they bring home $5000 per month and pay $2000 for debts (mortgage, car, credit cards) then their DTI is 2000/5000 or 40%, an ok number. Thanks to my friend Michael at NickelSteamRoller, we have some data here based on a low DTI of between 0-20% for Lending Club loans only in LC's entire history below:
(these loans are further examined by FICO score since we know that Credit Score is important too)
Note the default rate in column 3, that's what we are looking at in more detail.
Interestingly, across all credit scores above 660, the low DTI equates to low default rates. Furthermore, EVERY credit score above 670 has a default rate below 4% and it's relatively uniform (the default rate are close to each other for all scores from 670 to 769). At credit scores of 770 and above, we see a drop to below 3%.
As we can see here, DTI is an important measure to determine creditworthiness of our borrowers, and more importantly if we think the loan will pay back or default.