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- Debt-to-income ratio: what it is and why it matters
Personal Loan
Debt-to-Income Ratio: Your gateway to loan approval
If you have a plan to take a home loan, buy a car, or invest for your future, it is key that you know your debt-to-income ratio. It plays a major role in shaping your financial eligibility.
Defining Debt-to-Income ratio
Debt-to-Income Ratio, or more colloquially, DTI, is a simple number that tells how much of your monthly income goes towards paying debts. It’s expressed as a percentage. Lenders use DTI to check if you can handle more debt, based on what you already owe.
Here’s the formula for your use:
DTI = (Total Monthly Debt Payments / Gross Monthly Income) x 100
Example: Debt-to-income ratio
Let us say your monthly income before tax is ₹80,000, and total ongoing debt obligations, including EMIs and credit card payments, add up to ₹25,000. Using the above formula, we can calculate:
The Debt-to-Income Ratio would be: (₹25,000 / ₹80,000) × 100 = 31.25%
Since this ratio in the above calculation ratio is below the commonly accepted threshold of 40%, it shows healthy financial management on your part and increases the chances of loan approval with much better interest rates and terms.
Why is DTI important?
A healthy Debt-to-Income Ratio is usually below 40%. Lenders look for this metric when you apply for personal loans, credit cards, or property mortgages. So, if your DTI score is high, lenders may consider you to be a risky borrower. And, this can result in loan rejections or higher interest rates.
Conclusion
Managing your DTI is one of the first steps towards building long-term financial stability and creditworthiness. A lower DTI usually indicates that you have more free cash flow for every month. This fact gives you the freedom to invest in mutual funds, SIPs, stocks, or start building an emergency fund.
Disclaimer: This article is for information purposes 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.
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