Due to the rise of EMIs, maintaining a healthy debt-to-income ratio has become a major focus for financial stability and creditworthiness. According to a recent RBI report, over 43% of Indian urban households currently deal with some form of consumer debt.
It is time to understand this key metric if you wonder whether your finances are in shape or heading toward stress. Let’s get into more detail on the debt-to-income ratio, its meaning, why it matters, its calculations, and how you can improve.
What Is Debt-to-Income Ratio?
The debt-to-income ratio (DTI) is a simple measure that compares your monthly debt payments to your monthly gross income. It is ideal for lenders, as it helps decide if you can afford more debt, such as a home or personal loan.
DTI is responsible for showing how much of your income is going towards repaying debts, including:
- EMIs on home, car, or personal loans
- Credit card payments
- Any fixed monthly debt repayment
Why Does Debt-to-Income Ratio Matter?
Understanding the importance of debt to income ratio is important for lenders and individuals.
| Perspective | Importance |
| Lenders | The lender is responsible for evaluating risk before approving loans. A lower DTI equals a higher chance of repayment. |
| Borrowers | The borrower is in charge of managing personal finances and avoiding overborrowing. |
Debt-to-Income Ratio Formula
Below is how you calculate the debt-to-income ratio:
(Total Monthly Debt Payments / Gross Monthly Income) x 100
Suppose your monthly income is ₹80,000, and you pay the following:
- Car Loan EMI: ₹10,000
- Credit Card EMI: ₹5,000
- Personal Loan EMI: ₹5,000
Total Debt Payments: ₹20,000
DTI Ratio: (₹20,000 / ₹80,000) x 100 = 25%
A DTI of 25% is considered good and manageable.
What is a Good Debt-to-Income Ratio?
Here’s the overview of the range to determine which one is a good debt to income ratio:
| DTI Range | Financial Health | Loan Approval Likelihood |
| Below 30% | Excellent | High |
| 30% – 40% | Moderate | Medium |
| 40% – 50% | Risky | Low |
| Above 50% | Poor | Very Low |
Advantages of Debt to Income Ratio
The following are some of the benefits you will get while using a debt to income ratio:
| Advantages | Details |
| Increase in Loan Approvals | Having a lower DTI can increase your chances of getting a loan approval. |
| Improved Financial Stability | A low DTI can improve your chances of managing finances effectively. |
| Enhanced Financial Planning | You can make proper financial plans with a low DTI, as it gives you a clear picture of your debt to income relationship. |
Disadvantages of Debt to Income Ratio
Below are some of the reasons why a debt-to-income ratio is not always a good option:
| Disadvantages | Details |
| Does not Consider Your Living Expenses | A DTI does not consider rent, utility bills, or daily expenses. |
| The Credit Score is Not Reflected | Having a good DTI does not always mean you will have a high credit score. |
| It Can Be Misleading to People with High Earnings | People with higher incomes may seem stable despite large debts. |
How to Improve Debt to Income Ratio?
The following are some of the practical and proven ways you can use to bring your DTI ratio under control:
- Increase Your Income: You can take freelance work or a side hustle. Additionally, you can ask for a raise or consider job switching. Ensure you make wise investments.
- Pay Off High-Interest Debts First: Make it a priority to focus on clearing credit cards or personal loans with high EMIS. You can use the avalanche method to prioritise debts based on the interest rates offered.
- Avoid New Debts: Limit the use of credit cards and avoid impulse-based EMIS for gadgets or luxury items.
- Consolidate Existing Debts: Consider going for debt consolidation loans offering lower interest rates. The balancing of the transfers for credit cards can reduce EMI pressure.
- Automate EMI Payments: By automating EMI payments, you can prevent late fees and maintain discipline while making your repayments. Automating EMI payments helps you avoid defaults impacting your DTI and credit score.
- Review Monthly Expenses: You can track your spending using budgeting apps and take action on removing non-essential subscriptions or expenses.
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Your debt to income ratio is not just a number; it reflects how balanced your financial life is. Keeping it below 30% gives you more room for emergencies, growth, and investment. Knowing your debt-to-income ratio is ideal and can enable you to buy a home or gain better control over your finances.
Want to start improving today? Monitor your DTI monthly and make informed money decisions with platforms like Dhan that support your journey with insights and low-cost tools.
