The debt-to-income ratio (DTI) measures a borrower’s debt repayment capacity as per their gross monthly income. In simple terms, DTI is the gross of all monthly debt payments divided by the gross monthly income, calculated as a percentage. It is a tool that financial institutions and lenders use to anticipate a borrower’s ability to make monthly payments towards the debt and, in turn, repay the total amount.
Breaking down debt-to-income ratio (DTI)
Your debt-to-income ratio is one of the factors that affect your credit score and is essential when you wish to avail a loan. A low DTI ratio shows your creditworthiness and improves your chances to get fast loan approval and sanctioning.
What should you do to improve the DTI ratio?
- You can increase your EMIs toward a loan that you have availed. Though this will temporarily increase your DTI ratio (considering your income doesn’t change), it will, in the long run, bring down your total debt considerably. This, in turn, will reflect well on your DTI ratio.
- Do not acquire more debt.
- Postpone a few large purchases if you can. This will give you more time to save and help you make a larger lump sum payment in time.
- Don’t forget to keep track of the debt-to-income ratio every month. This will make it easier for you to notice deviations if any, and take corrective measures.
Additional Read: What Is Debt Consolidation?
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