- Date : 15/06/2022
- Read: 3 mins
Know your Debt to Income ratio: calculation, Ideal Ratio Your Ideal Debt to Income Ratio can help you to faster personal loans; calculate and know your ideal ratio
Personal finance has made it easier for consumers to make high-value purchases. Besides home, many automobile and durable sales happen through the EMI option, the mainstay of individual financing. However, the customer must follow some procedural requirements, like providing income details. The financier typically reviews a few parameters, like the Debt-Income ratio of the customer, before clearing the purchase. First-time buyers under an EMI scheme may wonder what the Debt to Income ratio is. Let us understand the details.
What is Debt to Income Ratio (DTI)?
The Debt to income ratio is a tentative measure of a borrower's repayment capability compared to the gross monthly income. The DTI is a primary financial tool used by lenders to assess a borrower’s ability to make monthly debt payments.
How to Calculate Your Debt To Income Ratio?
The DTI, in simple terms, is the total of all the monthly debt amounts you need to clear, divided by your gross income. The value is expressed as a ratio. Gross income is your earnings before taxes and deductions, and Debt means something owed. In other words, Debt is the money/goods borrowed from another party under an obligation to return.
Let’s take an example.
Your gross monthly income is Rs. 60,000;
Your monthly debt obligations are (say) –
a) Home loan EMI payment – Rs.15,000,
b) Car loan payment – Rs.4000,
c) Credit card payments – Rs. 1000;
Total monthly debt adds up to Rs.20,000.
Your DTI works out to be 33.3% (20000 / 60000)
How Significant is the Debt to Income Ratio?
The DTI is a vital matrix, among others, used by lenders to estimate your borrowing risk. A low DTI indicates a good balance between income & debts and the borrower's repayment capacity. A higher DTI demonstrates a disproportionate debt compared to income. Therefore, lenders view a high debt to income ratio as a potential sign of a possible default on a new loan.
What is the Ideal Debt to Income Ratio to Get a Personal Loan?
When your DTI is 20 to 35%, it is considered a good one for fast clearance of your loan proposal. On the other hand, a ratio of over 40% may limit your options, though some lenders may still finance you, but at higher interest rates. Likewise, a ratio of over 50% will bring the curtain down on personal loans.
What Should You do to be within the Ideal Debt to Income Ratio?
Staying within the ideal DTI range of 20 to 35% has many benefits. First, you reduce your chances of default. A no default record, in turn, increases your credit score* and fortifies your credit history. The possible steps to maintain a good DTI are:
a) Regularly reviewing spending habits and pruning non-priority expenses,
b) Postponing new expensive purchases,
c) Increasing your monthly debt payments,
d) If you get some unexpected funds, use them to clear debts, and
e) Attempting to increase income.
[* Credit scores are numerical values derived from the payment history of your credit cards.]
DTI, along with credit score and credit history, are significant parameters to avail personal finance. But, DTI, being easily measurable, can be your reliable support base.