Highlight: With the growing popularity of personal loans, it’s essential to know how your debt–to–income ratio affects your personal loans.
The debt-to-income ratio is a crucial factor that financial lenders check while assessing your loan applications. This ratio, also known as the DTI ratio, helps financial institutions assess your repayment ability. Lenders check this ratio when you apply for a personal loan because evaluating your repayment capacity is crucial in ensuring that they can get the funds back.
Read on to learn how your DTI ratio affects your personal loan application and more.
Before diving into the impact of the debt-to-income ratio on your personal loan application, here is a look into personal loans and their benefits. These are unsecured loans, which means you do not pledge any collateral to get the funding. Here are some other benefits:
Also Read: How to get an Instant Loan without documents
This is a monetary figure calculated as a ratio of your monthly earnings to your monthly debt payments. Remember that this ratio depends on your monthly gross income, which is the amount of your salary before tax and other deductions.
The part of your debt-to-income ratio is debt, which includes the following types of repayments:
However, exclude these expenses while calculating the personal loan debt-to-income ratio:
If you are wondering, “How to calculate debt-to-income ratio for personal loan,” the answer is simple, and it does not require any complicated mathematical formulas. To calculate, divide your total monthly outgo for debt repayment by your gross monthly income. After that, multiply the final figure by 100 to get the ratio.
To understand this better, consider this example: Suppose your gross monthly income is ₹55,000, and your monthly debt repayment amounts to ₹20,000. Then, your DTI ratio calculation will be: (20,000/55,000), which will give you 0.363636 and multiplying this by 100 gives you a ratio of 36.36%.
If you want to qualify for a mortgage, your ratio of debt to income must be less than 43%. The lower your DTI, the more likely the lender will accept your loan application. A low ratio indicates that you have enough income to pay off your present and future debts. This makes you a low-risk borrower, making you eligible for better loan deals. Remember, there are also two different sorts of debt-to-income ratios:
Also referred to as the household ratio, it deducts the amount that goes toward your home costs, including property taxes, mortgage costs, or insurance.
This ratio covers your other monthly bills, such as credit card payments and personal, vehicle, and student loans.
While most independent mortgage lenders prefer the back-end ratio, some lenders may also consider both ratios. However, it differs from one lender to the next.
When you apply for a loan, several factors influence your approval chances. One of these crucial factors is the debt-to-income ratio. In fact, your DTI ratio is an essential factor, just like your credit score for several lenders and financial organisations.
They use the debt-to-income ratio to assess your creditworthiness and repayment capacity. It informs them of the percentage of your current income you use to settle existing debt and whether you are a credit risk. If you have a high ratio, it indicates that you have a higher risk of non-repayment or that you are in a debt trap. Naturally, lenders do not prefer giving a loan to someone in a debt trap or someone who has a risk of non-repayment.
You should track your debt-to-income ratio at all times for your benefit. Tracking your finances is an essential aspect of smart planning. When your salary is reduced or you’re thinking about taking out a new loan, it’s a good idea to re-evaluate your DTI and your financial situation.
If you realise that your ratio of debt to income is too high, there are certain steps you may take to reduce it. You can do the following:
Another way to manage your DTI ratio efficiently is to choose low-cost loans. These loans help keep your borrowing costs low and EMI manageable. One such financial institution you can rely on is Fibe. You can apply for an Instant Personal Loan ranging up to ₹5 lacs without any hassle.
Download the Personal Loan App, or simply log in to our website for easy, quick, and affordable access to funds.
While some lenders offer loans to individuals with a high DTI ratio, they usually charge high interest rates. Hence, the cost of borrowing will be higher. So, keeping your ratio at an acceptable level is always ideal.
While some lenders consider 43% as good ratio for debt to income, others prefer it to be below 36%.
No, lenders generally consider a ratio of 43% or below as good.