Debt-to-Income ratio (DTI) is an important aspect of personal finance that directly impacts your ability to secure a personal loan. It is a financial metric that measures the proportion of your total monthly debt payments to your monthly income. Lenders use this ratio as a crucial factor to evaluate your creditworthiness and assess your ability to manage additional debt, such as a personal loan.

Calculating your DTI is quite straightforward. Simply add up all your monthly debt obligations, including existing loan EMIs, credit card dues, and any other fixed monthly payments, and divide it by your total monthly income. The resulting percentage is your DTI. Now, what is important to understand is, how your DTI impacts your personal loan application. Let’s dive right into it.

The impact of DTI on personal loan eligibility

  • Loan eligibility: Lenders use the DTI ratio to gauge whether you can handle the financial burden of a new personal loan. Generally, a lower DTI is preferred, as it suggests that you have a comfortable income-to-debt balance, making you more eligible for a personal loan.
  • Higher loan amount: A low DTI not only boosts your eligibility but also increases your chances of securing a higher loan amount. Lenders perceive borrowers with a lower DTI as less risky, making them more inclined to approve larger loan sums.
  • Competitive interest rates: A healthy DTI ratio can also do wonders in negotiating a better interest rate on your personal loan. Lenders often reward low-risk borrowers with more favourable terms, resulting in reduced interest rates and ultimately, saving you money.

How to improve your DTI for a personal loan application

If your DTI is on the higher side, there are several steps you can take to improve it and enhance your chances of obtaining a personal loan on favourable terms:

  1. Clear existing debt: Prioritise paying off smaller debts or credit card balances to reduce your overall debt load before applying for a personal loan.
  2. Avoid new debt: Refrain from taking on additional loans or new credit card purchases in the months leading up to your personal loan application.
  3. Increase income: While not always feasible, exploring opportunities to boost your income can significantly improve your DTI ratio.
  4. Utilise a personal loan EMI calculator: Before applying for a personal loan, use an online personal loan EMI calculator to estimate the potential monthly instalment. This will give you a clear picture of how the loan will affect your DTI ratio and help you make an informed decision.

Wrapping up

Your debt-to-income ratio is a crucial factor when it comes to obtaining a personal loan. Lenders use this metric to assess your financial stability, loan eligibility, and interest rates. By maintaining a healthy DTI and implementing the tips mentioned above, you can increase your chances of obtaining a personal loan with a competitive interest rate and repayment terms that suit your financial situation.

Remember, responsible borrowing and diligent management of your debts are the keys to achieving your financial goals. So, calculate your DTI, explore your personal loan options, and take the next step towards fulfilling your dreams!


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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.