What is the debt-to-income ratio? Know its formula and How to improve it

Updated on: 16 Apr 2025

Debt-to-income ratio is an essential criterion that helps financial institutions evaluate your finances. This figure affects the loan amount and credit card limit that you can get.

When you apply for credit, lenders determine this ratio since it reflects your borrowing capacity. Continue reading to understand the significance of this ratio in your loan application process and learn how to calculate it using the debt-to-income ratio formula.

Understanding your DTI Ratio

As mentioned, your DTI ratio is an important metric that impacts your credit score and your ability to borrow funds. It is a percentage of your total debt per month against your total earnings in a month.

Experts recommend that you maintain a 35% or lower DTI figure so you can apply for credit without the risk of rejection. Why? In simple words, this number indicates the percentage of your income that goes towards repaying debt.

No wonder lenders prefer a lower ratio because it means a borrower can afford a new loan and is likely to repay it on time. A higher ratio means that your income may be stretched too thin, and the borrower is less likely to pay EMIs on time and more likely to default or delay repayment. Further, having a higher ratio indicates higher dependence on loans and credit cards. Such borrowers pose big red flags for lenders.

Thus, your debt-to-income percentage affects whether or not your loan application will be approved, and also helps lenders decide on your interest rate. With a lower debt-to-income ratio, you seem more reliable to lenders and can get a more competitive rate of interest on a loan.

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Depending on your ratio of debt against income, here are your chances of availing of affordable loans:

10% or less: You can get loans at affordable interest rates easily and quickly, as only up to 10% of your income per month is being used to service debt
11-20%: You can avail of competitively priced loans without much hassle, as up to 20% of your monthly earnings are going towards repayment
21-35%: While you can get quick approval on loans provided you meet all the eligibility criteria, as up to a third of your monthly income is targeted towards paying EMIs, you can try to bring this down
36-50%: Approval of credit is less likely, and the interest rates may be higher as up to half of your earnings are being used to repay debt
More than 50%: Qualifying for credit can be challenging at this stage

Debt-to-income ratio formula and calculation

To better understand how this ratio works, you must know the simple formula:

DTI percentage = Total Monthly Debt / Net Monthly Income X 100

Here is an example:

Say Manvi wants to apply for personal loan. To avoid rejection, Manvi wants to check her debt-to-income ratio. Here are her monthly obligations and earnings:

Car loan: ₹15,000
Credit card bill: ₹5,000
Net monthly income: ₹80,000

Her total monthly debt = ₹15,000 + ₹5,000 = ₹20,000

DTI percentage = ₹20,000 / ₹80,000 X 100 = 25%

With this ratio, Manvi has a good chance of approval on her personal loan application.

While DTI refers to the ratio for individuals, do not mistake it for debt ratio, which is what applies to companies. The debt ratio formula is total debts divided by total assets.

Learn how to apply pan card loan 20,000

How to Improve Your Debt-To-Income Percentage?

Since a lower DTI ratio improves your credit score, ensure that you track yours and reduce it when possible. Improving it takes perseverance and patience. With some financial planning, you can lower your debt burden quickly.

Here are some strategies to reduce your debt and improve the ratio.

Start by paying off your smallest loans in full
Refrain from taking any additional loans
Clear off credit card debts, if any
Consider increasing your existing loan EMIs to accelerate loan closure
Seek opportunities to boost your income, such as freelancing
Avoid unnecessary expenses and prioritise debt settlement

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FAQs on Debt-to-Income Ratio

What is the ideal debt-to-income ratio?

A debit-to-income ratio under 35% is considered ideal.

How do you calculate the debt-to-income ratio?

To calculate your DTI ratio, add all your monthly debt payments and divide it by your monthly income and multiply it by 100.

Is a 40% debt-to-income ratio good?

The general rule of thumb is to keep your DTI ratio under 35%. A higher DTI can adversely affect your chances of getting affordable credit. That being said, a 40% DTI ratio is considered fair.

Is 11% a good debt-to-income ratio?

Yes, with an 11% ratio, you should be able to get credit from any bank or financial institution. However, this also depends on meeting other eligibility criteria.