A Personal Loan can be of great aid as it can provide funds for additional expenses such as payment of rent, medical emergencies, wedding decorators, etc. With online loan application, availing loan is straight forward and easy. But to avail of a Personal Loan, lenders look at your debt-to-income ratio as one of the prerequisites for approval. Confused why do they do that? Continue reading to know how debt to income ratio is related to a Personal Loan.
The debt to income ratio (DTI) is a simple way to measure how much of your monthly income goes toward paying your debts. Having a low DTI ratio means you have struck a good balance between your debt and your income. In simpler terms, let us say your DTI ratio is 15% – that means only 15% of your monthly gross income is used to pay off your debts. On the other hand, a high debt-to-income (DTI) ratio indicates that you may have borrowed too much money in relation to your monthly income.
When you apply for a personal loan, lenders consider your debt-to-income (DTI) ratio to assess if you can handle more debt responsibly. They want to see a low DTI ratio because it shows that you have a good balance between your income and the debt you already have. A lower ratio means you are using a smaller portion of your income to pay off debts each month. This suggests that you have more financial flexibility and can comfortably manage the additional loan payments.
On the contrary, a high DTI ratio raises concerns for lenders. It means a large portion of your income is already going towards debt payments, leaving less room for new loan payments. Lenders may worry that you might struggle to handle even more debt in this situation, and they may hesitate to approve your personal loan application.
Keep in mind that different lenders have different requirements regarding DTI ratios. Some lenders are more flexible while others have stricter limits. Besides this ratio, lenders also consider factors like your credit history, job stability, and overall financial health when deciding whether to approve your loan.
Your DTI ratio can have a big impact on your ability to get a Personal Loan and the terms you're offered by lenders. Here is how it works:
To determine your debt-to-income ratio, you simply add up all the money you owe each month for debts like loans and credit cards. Then, you divide that total by your gross monthly income, which is the amount you earn before any taxes are taken out. The formula is as follows:
DTI ratio = (Total debt payments per month / Gross monthly income) * 100
For instance, your gross monthly income is Rs.1,20,000, and you have a total monthly debt obligation of Rs.29,000. So, your DTI ratio will be:
(29,000 / 1,20,000) * 100 = 24.16
As the DTI ratio is 24.16% and most lenders consider a range of 21% to 35% ideal, you shall be looked upon favourably by lenders when you apply for a Personal Loan.
Instead of manually calculating, you can make use of a DTI calculator, a debt-to-income ratio calculator will help you plan your financial goals better.
Also Read - What is a Debt Trap: Here is How to Avoid It
It is important to keep in mind that different lenders have their own rules about debt-to-income requirements for Personal Loans. It is recommended to compare various lenders to find the one that suits your financial situation best. By maintaining a healthy DTI ratio and being aware of how much you can comfortably borrow, you increase your chances of successfully getting approved for a Personal Loan. This not only helps you secure the funds you need but also sets you up for better financial results in the long run.
Yes, your debt-to-income ratio matters when you apply for a Personal Loan. Lenders look at your DTI ratio to see if you can take on additional debt and pay EMIs on time.
A 50% DTI ratio would be considered too high for many lenders. This could make loan approvals difficult to get. Even if it gets approved, the borrowed amount may come with high interest rates.
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