Understanding Debt To Income (DTI) Ratio And How To Calculate Your DTI

Debt to income (DTI) ratio is the percentage of one’s gross monthly income that goes towards servicing all current debts such as personal loan EMIs, credit card bill repayment, rent, etc. It is also one of the main aspects that lending institutions take into consideration to determine a borrower’s ability to repay a loan in time.

A debt to income ratio can be calculated by adding all fixed monthly debt payments and then dividing the amount by gross income. Let’s consider an example to better understand this ratio. Individual A earns a monthly income of Rs 50,000, and pays a personal loan EMI of Rs 25,000 along with Rs.10,000 as rent. So, the gross expenses are equal to Rs 35,000. Consequently, A’s debt to income ratio would be 70%.

Ahigh DTI ratio is considered riskier by lending institutions since it reflects an excessive strain on finances and indicates that the borrower may not be able to repay his or her second loan EMI in time. Contrarily, a debt to income ratio below 40% is considered ideal by lending institutions.

Thus, to get easy approval for a personal loan or any other such advance, individuals should take steps to reduce their debt to income ratio. Some of the common steps to do so include –

  • Paying off a current debt quickly

To reduce this ratio, borrowers should try to pay off a loan as quickly as possible. To this end, they can consider part-prepayment or personal loan foreclosure of their loan account. Apart from that, they can also consider paying more than the specified amount as EMI to pay it off early.

  • Avoid availing additional debt –

One should also avoid accumulating additional debts before reducing the ratio. Some of the things to avoid for doing so would include checking credit card use, not applying for additional credits, postponing big-ticket purchases, and the likes.

Apart from a low debt to income ratio, borrowers should also meet the other eligibility parameters specified by the lending institution to ensure quick approval of their loan application.

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