What is Debt-to-Income Ratio? How to Improve It?

What is the Debt-to-Income Ratio?

The debt-to-income ratio is the calculation of all the debt payments done by an individual in the month divided by the gross income per month. This is the ratio that calculates how much of your earnings are going into debt every month. Higher the debt to income ratio signifies that an individual is in more debt. On the other hand, a lower debt-to-income ratio signifies that a person is spending less amount of money per month in debt. This ratio is a very important considerable factor for the CIBIL score.  It is very important to know your debt-to-income ratio for making wise financial decisions. 

Borrowers having low debt-to-income ratios are more likely to get loans easily than the people who are having higher debt-to-income ratio. The possible reason for the same is that banks, NBFCs want to be sure that a borrower isn't overextended meaning they have too many debt payments relative to their income. Hence, people with a low debt-to-income ratio are potential borrowers, if you are thinking of taking financial help calculate your debt-to-income ratio.

How to Calculate the Debt-to-Income Ratio?

Managing finance is one such thing which not taught by any teacher in the school. But the growing importance of financially stable society it is the need of an hour to know how to calculate the DTI ratio. Mentioned below is the formula for debt-to-income ratio. Calculate debt-to-income ratio and get awareness of all your expenses and debts per month. 

Debt to Income Ratio Formula

Total Monthly debt payment ÷ Gross Income of the month = Debt-to-income ratio

For example: If Mr. Borrower has a monthly income of Rs. 50,000 per month and he has two ongoing loans for which the EMIs are Rs.5,000 and Rs. 10,000 respectively. So the debt-to-income ratio of Mr. Borrower will be calculated by the following formula. 

EMIs= Rs. 5000+ Rs. 10000

Total EMIs= Rs. 15000

Salary per month: Rs. 50000

Hence, Debt to income ratio: 15000/ 50000 = 0.3 

This means that Mr. Borrower is giving 30% of his monthly income in debt. This ratio is apt for taking loans. However, a DIT ratio higher than 33% is not suitable for the people who are thinking of taking a loan. 

Ideal Debt-to-Income Ratio

The ideal debt-to-income ratio as per the banks and NBFCs is not more than 36% for an individual. Usually financial institutions prefers 28% of the income going towards servicing a mortgage or rent payment. 43% DTI is considered to be higher and have low preferences getting loan approved from the banks.

• Below 35% is generally considered cheap and the debt is manageable. After paying your monthly bills, you probably have money left over.
• 36% to 49% means that the DTI ratio is reasonable, but there is room for improvement. Lenders may have other eligibility requirements.
• His DTI ratio of over 50% means he has limited money to save or spend. As a result, you may not have the money to handle the unexpected and have limited borrowing options.

Tips to Improve Debt-to-Income Ratio

If the Debt-to-income ratio is not below 33%, it is a matter of concern for the person who is thinking of applying for the loan. Here are the quick tips to improve your debt-to-income ratio. 

• Do not incur more debt than required.
• Increase EMI and pay off the loan quicker, it may increase the DTI for a while but make it stable after a certain period of time
• Not to opt for debt if DTI is stabled at 35%.
• Increase monthly income.
• Foreclosing the existing loans is a better idea if you are thinking of stabilizing debt-to-income ratio.

Conclusion

Debt-to-income ratio is the calculation of all the debt payments done by an individual in the month divided by the gross income of a person. It is an important factor taken in consideration by banks for the people who are thinking about taking a loan. An ideal DTI ratio is 33%, a person having DTI ratio of 33% is a potential borrower as per the norms. Learn tips and tricks to improve your DTI and get hassle-free loans from My Mudra.

Also Read:
- What is Debt-to-Equity Ratio and How to Calculate it?
- Top Debt Consolidation Loan Providers in India