What is debt to income ratio? Should it be high or low?
Banks check your debt to income ratio (DTI) before approving a loan. This ratio is your gross income to all your existing debt. A lower DTI ratio implies that you maintain a healthy balance between debt and income and have headroom for additional debt. A higher ratio would impede your ability to take on further loans, and may therefore lead to loan rejection. The lower this ratio, the better.
DTI can be easily calculated before applying for a loan. Suppose your gross monthly income is Rs. 70,000, and you pay Rs. 20,000 as Home Loan EMI, Rs. 7,000 for Car Loan, and Rs. 5,000 for other loans. This means that your total monthly debt will be Rs. 32,000, implying a DTI of Rs. 32,000/Rs.70,000 *100 = 45.71, which is fairly high. You may want to clear existing loans before applying for a fresh one. Typically, banks look for a DTI that is less than 50. However, they might prefer borrowers who have a DTI below 40.
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