What is debt to income ratio? Should it be high or low?
Debt to income ratio simple speaking is an estimate percentage of your gross income and debts. A debt to income ratio is significant as it shows the balance you maintain over your debt and income. A low debt to income ratio for example means that you maintain a good balance between income and debt while a high DTI can imply you have too much debt compared to your total income. So a lower DTI ratio is always preferable as suggested by most financial experts. A DTI ratio of around 35% is considered to be as ideal.
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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