What is Debt to Income ratio (DTI)?

A debt-to-income ratio (DTI) evaluates how well you manage debt by comparing your monthly debt payments to your gross income. It provides lenders with insight into your creditworthiness by indicating the portion of your income used to meet debt obligations.

Understanding debt-to-income ratio

The debt-to-income ratio is an essential financial metric. A lower debt-to-income ratio suggests that you're managing debt well and are in a better position to handle new credit. Conversely, a high DTI ratio might signal that you’re financially stretched, which can make it harder to get loans approved.

How is debt-to-income ratio (DTI) calculated?

Debt-to-income ratio formula

Debt-to-income ratio = (Total monthly debt payments ÷ Gross monthly income) * 100

Steps to calculate debt-to-income ratio

• Check monthly debt payments: Include your mortgage, loans and Credit Card payments.
• Calculate gross monthly income: Sum up your income before taxes.
• Apply the DTI formula: Use the formula to calculate the percentage of income spent on debts.

Example of debt-to-income ratio

Let’s say your total monthly debt payments are ₹33,000, and your gross monthly income is ₹1,00,000.

DTI = (₹33,000 ÷ ₹1,00,000) * 100 = 33%

This means 33% of your income goes toward paying debt.

What is the ideal debt-to-income ratio?

Why is the DTI ratio important?

• Loan approval: Lenders rely on your DTI ratio to assess risk.
• Better loan terms: A lower DTI ratio often leads to more favourable interest rates.
• Debt management: It ensures that your debt level is manageable.

How to lower your debt-to-income ratio?

• Pay off high-interest debts: Clear costly Credit Card balances first.
• Consolidate debts: Use a Personal Loan to combine multiple debt payments into a single, lower monthly amount.
• Increase income: Look for additional sources of income to balance your DTI.
• Avoid new debts: Refrain from taking on new loans until your DTI ratio improves.

How does a lower debt-to-income ratio help?

A low debt-to-income ratio improves your chances of loan approval, often with better interest rates. It also indicates financial health and flexibility, allowing you to save more and manage unexpected expenses.

Also Read: When should you avail of a Personal Loan?

Conclusion

Managing your debt-to-income ratio is crucial for financial stability and loan approvals. By calculating it regularly and taking steps to lower it, you improve your financial health and position yourself for better borrowing opportunities.

If you are looking to reduce your debt or consolidate multiple payments, opting for a solution like an Axis Bank Personal Loan can be helpful. With competitive rates and flexible repayment options, you can manage your debts more efficiently while lowering your overall DTI.

FAQs

How often should DTI be calculated?

You should check your DTI ratio every few months, especially before applying for a loan.

Is a high DTI good?

A high DTI indicates that a large portion of your income is allocated to debt payments, potentially making it harder to qualify for loans.

What are the factors that determine DTI?

DTI depends on your total debt payments and gross income. An increase in debt or reduction in income will raise your DTI.

What is the DTI limit for Personal Loans?

Lenders typically prefer a DTI below 40% for approving Personal Loans. A higher DTI may result in loan rejection or unfavourable terms.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.