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If you’re planning to take a loan, one of the most important factors that lenders consider is your Debt-to-Income Ratio (DTI). This ratio helps measure your ability to repay a loan by comparing your total debt payments to your income.
A healthy DTI shows that you’re managing your debts well, while a high DTI could signal a risk of over-borrowing. Understanding how the DTI ratio works can help you assess your finances and improve your chances of getting loan approval.
The Debt-to-Income Ratio, or DTI, is a financial measure that compares your monthly debt payments to your monthly income. It tells lenders how much of your earnings are already going towards paying off existing debts.
The lower your DTI ratio, the more room you may have to take on a new loan. It gives a clear picture of whether you can afford more debt based on your current income and liabilities.
The basic formula to calculate your Debt-to-Income Ratio (DTI) is:
DTI Ratio = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
This gives you a percentage that reflects how much of your monthly income goes toward repaying debts. A lower percentage means you have more room in your budget to manage additional debt, while a higher ratio may signal financial strain. You can also use a Debt-to-Income ratio calculator for convenience.
To calculate your DTI ratio, follow these simple steps:
1.List all your monthly debt payments
This includes EMIs for personal loans, home loans, vehicle loans, credit card dues, or any other recurring monthly debt.
2.Add up your total gross monthly income
Use your pre-tax income. If you have multiple income sources, include all of them.
3.Apply the DTI formula
Divide your total debt payments by your gross monthly income. Then multiply the result by 100 to get your DTI as a percentage.
Example:
If your total monthly debt is ₹25,000 and your gross monthly income is ₹75,000:
DTI = (25,000 ÷ 75,000) × 100 = 33.3%
This means 33.3% of your income goes toward debt repayments.
Your DTI ratio includes all fixed, recurring debt payments that you make each month. These are obligations that you must pay regularly, regardless of your spending habits.
Here’s what typically counts:
Loan EMIs: Personal loans, home loans, education loans, vehicle loans, etc.
Credit Card Dues: Any minimum payments due on your credit cards
EMIs on Consumer Durable Loans: Monthly instalments on electronics, appliances, or furniture bought on EMI
Any Existing Overdraft Repayment Commitments or monthly payments under a credit line
Other Fixed Debt Obligations, such as mortgage payments, if applicable
These payments are included because they affect your ability to repay a new loan. The total is compared against your income to calculate your DTI ratio.
Not all expenses are included in your DTI calculation. The ratio focuses only on debt obligations, not general living costs or non-credit expenses.
Here’s what is usually excluded:
Utility Bills: Electricity, water, internet, and mobile bills
Rent: If you are a tenant, monthly rent is not included as a debt obligation
Insurance Premiums: Health or life insurance premiums are not counted unless they are linked to a loan
Groceries and Daily Expenses: Regular household spending is not considered part of debt
Investments: SIPs, mutual funds, and savings contributions are not treated as debts
These exclusions ensure that only committed loan repayments are considered when assessing your borrowing capacity.
Your Debt-to-Income Ratio is one of the key factors that lenders use to assess your loan eligibility. It helps them understand how much of your income is already committed to repaying debts and whether you can manage new financial obligations comfortably.
A lower DTI ratio shows that you are financially stable and more likely to repay your loan on time. This improves your chances of getting loan approval and may even help you secure better interest rates. On the other hand, a high DTI ratio may indicate financial stress, leading lenders to reject your application or offer lower loan amounts at higher rates.
Monitoring your DTI ratio helps you stay in control of your finances and avoid taking on more debt than you can handle.
In most cases, a DTI ratio of below 35% is considered good. It suggests that you are using a reasonable part of your income to repay debt and still have room for future obligations. Lenders may have different thresholds, but keeping your DTI low is always better for your financial health.
Here’s a general view of what your DTI ratio might indicate:
DTI Range |
Category |
Meaning |
|---|---|---|
Below 20% |
Excellent |
You are managing debt well and likely to be approved easily |
20% to 35% |
Good |
Most lenders will consider you for loans |
36% to 40% |
Fair |
You may still get approved, but with stricter terms or lower amounts |
Above 40% |
High Risk |
You may struggle to get new credit or face high interest rates |
Disclaimer: The DTI ranges above are indicative and may vary by lender, loan type, and borrower profile.
If your DTI ratio is too high, reducing it could improve your financial stability and increase your chances of loan approval.
Here are some practical steps you can take:
Pay Off High-interest Loans Early
Focus on clearing personal loans or credit card dues, as they often have higher EMIs and interest rates.
Avoid Taking on New Debt
Unless absolutely necessary, delay taking new loans until your current DTI improves.
Increase Your Income
Consider secondary income sources like freelancing, rental income, or part-time work to improve your income-to-debt ratio.
Limit Credit Card Usage
Keep your card balances low and pay more than just the minimum due to avoid growing debt.
Consolidate Your Loans
If possible, merge multiple debts into one loan with a lower EMI and interest rate. This can bring your monthly outgo down.
Review EMIs and Tenure
If your EMIs are high, check if your lender offers the option to increase tenure, which can reduce monthly payments.
Yes. By combining multiple debts into a single loan with lower EMIs, you reduce your monthly outgo. This helps bring down your overall DTI ratio.
Yes. The EMI for a home loan is included in your DTI calculation, just like any other loan repayment. A large EMI can increase your DTI significantly.
It’s a good idea to review your DTI ratio regularly, especially before applying for a loan. Monitoring it helps you stay in control of your finances.
A high DTI ratio means a large part of your income goes towards debt repayment. It may make it harder to get new loans or lead to costlier terms.
Your monthly EMI payments and gross income are the two main factors. New loans, pay hikes, debt prepayments, or defaults can all affect your DTI ratio.
Generally, a DTI below 35% is considered good. It indicates you are managing your debts well and may be eligible for new credit.
It is calculated using the formula:
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Yes, a 7% DTI is excellent. It shows that a very small portion of your income goes toward debt, making you a strong candidate for new loans.
A 40% DTI is acceptable but on the higher side. Some lenders may approve your loan, but the interest rate or loan amount may be less favourable.
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