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Personal Loan: How does your DTI ratio affect your chances of getting a loan?
By When it comes to securing a personal loan, banks and NBFCs look closely at several factors. These include your age, monthly income, credit score, profession, and a crucial metric: the debt-to-income (DTI) ratio. This ratio has a significant impact on loan eligibility, loan amount, and approval odds. But what exactly is the DTI ratio, how do you calculate it, what’s considered a good number, and why does it matter to lenders? Here’s everything you need to know about your DTI and tips to improve it for better loan prospects.
What is the Debt-to-Income Ratio, and How is it Calculated?
The debt-to-income (DTI) ratio is a simple percentage that shows how much of your monthly income goes towards paying off debt. It includes EMIs, credit card dues, and other loan payments. For instance, if your monthly income is Rs. 1,00,000, and Rs. 20,000 goes towards debt, your DTI ratio is 20%. Calculating it is easy:
DTI Ratio = (Total Monthly Debt Repayment / Total Monthly Income) x 100
For example, if Dimple earns Rs. 1,50,000 per month and her debt obligations amount to Rs. 25,000, her DTI ratio is:
= (25,000 / 1,50,000) x 100
= 16.67%
But is this good? And how does it influence personal loan approval?
Ideal DTI Ratio for Loan Approval
Each lender has its own benchmark, but most banks prefer a DTI ratio under 35%. Ratios under this level signal a good balance between income and debt, which boosts loan approval chances. If your DTI exceeds 35%, lenders may scrutinize your application more closely, and ratios above 45% generally reduce approval odds significantly. High DTI ratios can indicate too much debt relative to income, raising red flags for banks that suggest limited financial flexibility for additional debt.
How Does DTI Impact Your Personal Loan Eligibility?
DTI Under 35%: This is ideal, signaling that 35% or less of your income goes toward debt, indicating a manageable financial situation with room for new loans.
DTI Between 35%-45%: This range is considered moderate risk. Lenders may still approve your loan but could limit the loan amount or ask for extra documentation.
DTI Over 45%: A high DTI often leads to rejected applications or requests for collateral. High DTI levels suggest a heavy debt load relative to income, posing a higher risk to lenders.
Tips to Improve Your DTI Ratio Before Applying for a Loan
If your DTI is high, consider these steps to lower it and increase your loan approval chances:
Make Extra Payments: If possible, pay above your regular EMIs to reduce outstanding debt.
Foreclose Smaller Loans: Paying off smaller loans can free up monthly income and improve your DTI.
Restructure Loans: Extending loan tenure can lower EMIs, helping reduce your DTI in the short term.
Postpone Big Purchases: Avoid major expenses until your DTI is in a comfortable range.
Final Check: Calculate Your DTI Ratio
Before applying for a loan, calculate your DTI ratio using an online calculator. By entering your monthly income and debt obligations, you can determine if adjustments are needed. Working to reduce your DTI ratio may improve your chances of getting approved for a personal loan with favorable terms.