Nov 27, 2020Other Loans
The Debt to income ratio is the comparison or relationship between your monthly income and monthly payouts to pay back debts or borrowings. It shows the ability of the person to pay their debt installments easily and without undue pressure. A high debt to income ratio creates financial stress of repayment as well as lowers your credit score thereby making future loans more difficult to obtain as well as more expensive.
The Debt to Income Ratio is one of the important ratios used by lenders to evaluate the borrower's ability to repay any future loans they are applying for and not default on the EMI’s that would commence. This ratio lets them know what percentage of your current income is already being used to repay your existing debts and whether or not you are a credit risk.
You can use the knowledge of your own debt – income ratio for evaluating whether or not you should take a loan currently or should defer a purchase for a period. If you find you have a high debt to income ratio take the steps mentioned below to actively lower this ratio.
The debt-to-income ratio is basically a calculation of - all your monthly debt payments divided by your gross monthly income. Your monthly debt repayments include all your existing loan EMIs as well as credit card EMIs. Your gross monthly income is your monthly salary which you get after all tax deductions.
Gross Monthly Debt = All the debt payments to be made monthly at the time of calculating the ratio
Gross Monthly Income = The monthly income earned by you.
Fullerton India offers a personal loan eligibility calculator as well as a personal loan EMI calculator online. This will automatically calculate the amount of personal loan you are eligible for depending on your income and existing obligations, as well as the EMI you will have to pay every month for a certain interest rate and tenure. Thus, the personal loan eligibility calculator primarily factors in the Debt-income ratio.
Mr. A wish to borrow a loan. His yearly income is 18,00,000. He has ongoing EMI towards home loan of Rs.50,000 and EMI towards car loan of Rs.20,000.
Once his car loan is paid off Mr. A’s Debt-income ratio will become (1,50,000/50,000)*100 = 33.33% which is a very acceptable value.
Must Read: How to Avail Tax Benefits On Personal Loan?
The Debt to Income ratio is the measure of the percentage of the income of a person that is being used up for debt repayment and servicing. This measure is important as it affects your Credit score and credit rating. This is an important criterion when you wish to borrow a loan. A low debt-to-income ratio shows repayment capacity and creditworthiness (in terms of financially responsible behavior)of the borrower and a high debt-to-income ratio shows a potential inability to pay new EMIs. Since this is the criterion also checked by lenders, a low debt – income ratio increases your chances of being eligible for loans at the best interest rates.
It’s a prudent move to keep checking your debt to income ratio when any of the parameters – such as income or debt, change so that you can make informed decisions about how to maintain a low ratio.
This may happen if your income increases or decreases or a past debt is paid off in full thus reducing the gross monthly debt.
A Debt-Income ratio of 21% - 35% is considered a very good ratio.
You are considered to be in a good financial condition when your debt-income ratio is between 20-35% and may find it easy to get a personal loan. If your debt-income ratio is between 35%-60%, there is a chance that your loan may get approved, but at a higher rate of interest. Applicants whose debt-income ratio is higher than 60% may find it very difficult to get a loan.
Please note that debt-income ratio is only one of the eligibility criteria for a personal loan. Your loan approval will also depend on a number of other factors. To know more, please check our personal loan eligibility criteria.
For your own knowledge, you should at all times monitor your debt to income ratio. It is a part of good financial planning to have a tab on your finances. When your income rises or when you are considering the idea of availing a new loan, it is a good idea to re-check your debt-income ratio and assess your financial position.
If you notice that your Debt to Income Ratio is high then there are things you can do to lower it. You can: