In the evolving landscape of Indian lending, the debt-to-income ratio (DTI) has emerged as a critical factor that can make or break your loan application. Financial institutions across the country are increasingly prioritizing this metric alongside traditional credit scores when evaluating personal loan and credit card applications.
What Exactly is Debt-to-Income Ratio?
The debt-to-income ratio represents the percentage of your monthly income that goes toward repaying existing debts. This simple calculation provides lenders with a clear picture of your financial health and repayment capacity. Most Indian banks and NBFCs prefer applicants with a DTI below 40%, though some may consider ratios up to 50% for high-income individuals.
Consider this example: if your monthly income is ₹1,00,000 and you pay ₹25,000 toward various EMIs including personal loans, home loans, and credit card bills, your DTI stands at 25%. This falls within the acceptable range that most lenders find comfortable.
Why Lenders Are Focusing Heavily on DTI
Financial institutions have compelling reasons to scrutinize your debt-to-income ratio carefully. A DTI exceeding 50% raises serious red flags about potential default risks, regardless of your credit score. Here's why lenders consider this metric indispensable:
Risk Assessment: DTI helps determine whether you can handle additional EMI payments without experiencing financial stress.
Loan Pricing: Applicants with lower DTI often qualify for more competitive interest rates and flexible repayment tenures.
Eligibility Determination: Many loan applications get rejected primarily due to high DTI, even when the applicant boasts an excellent credit score.
Practical Steps to Improve Your DTI Ratio
Improving your debt-to-income ratio requires strategic financial planning. Here are effective methods to enhance this crucial metric:
Prioritize clearing high-interest debts first, as they consume a significant portion of your income. Consider consolidating multiple personal loans into a single manageable payment.
Avoid taking on new EMIs before applying for additional credit. Even small monthly payments can negatively impact your DTI calculation.
Explore opportunities to increase your monthly income through freelance work, performance incentives, or rental yields from property investments.
Practice financial discipline by avoiding unnecessary borrowing for luxury items like expensive watches, clothing, or non-essential gadgets.
Maintaining a DTI below 35% significantly improves your borrowing profile and increases the likelihood of loan approval. Combined with a credit score of 750 or higher, a healthy debt-to-income ratio can secure better terms and lower processing fees from lending institutions.
As the lending environment becomes more cautious about bad loans, understanding and managing your DTI has become non-negotiable for Indian borrowers. By keeping this ratio in the lower double digits, you demonstrate financial responsibility and significantly enhance your creditworthiness in the eyes of lenders.
