Loan applications can be very exciting, and the most common are for a home, a car, or a personal purpose. However, one key number can make or break your chances of getting that appointment approved, and that is the debt-to-income (DTI) ratio.
A high DTI ratio could suggest to lenders that one is saddled with too much debt. This lowers the chance of approval, or else one ends up with a whopping interest rate. The good news is, however, that certain smart financial decisions can help you balance that debt-to-income ratio and increase your chance at that loan.
This guide will help you follow some practical, actionable steps toward getting finances in order before attempting to pair them with a loan.
What Is Debt-to-Income Ratio and Why It Matters
The percentage of your monthly income that is applied to the repayment of debts is what the debt-to-income ratio shows. The formula to compute it is the following,
Debt-to-income ratio = (Total monthly debt payments / gross monthly income) x 100
Given the case where the monthly debt payments amount to 30,000 rupees and the monthly income is 1,00,000 rupees, the DTI is 30%.
Lenders are usually more inclined to applicants with lower DTIs, as it indicates that you are earning enough to take the credit responsibilities in a good way. They may also offer you a better loan with a lower interest rate.
Step 1 – Make a Complete List of Your Debts
The initial approach to improving your DTI is to have a grasp of your present debt scenario. List all your debts that come in all forms, like the following.
- Credit card balances
- Personal loans
- Home loans
- Car loans
- Any other recurring debt
Take note of your monthly payment for each debt. This not only provides you with an exact idea of what your financial condition is, but also helps you decide which debts to deal with first.
Step 2 – Focus on Increasing Your Income
Raising the amount of money you make every month can definitely lead to a reduced debt-to-income ratio. Ways to increase your monthly income include,
- Freelance work and part-time jobs
- Looking for a raise in pay at your present job
- Renting out property you are not using or rooms of your house
- Selling things that you do not need anymore
Even a little extra money can have a big impact on your DTI and greatly increase your chances of getting a loan.
Step 3 – Pay Down Existing Debts Strategically
The most effective way to increase your DTI and pay off your debt is through paydown. Why not invest your time in;
The higher-interest debts – credit cards and payday loans are normally the most expensive ones. Cutting them quickly reduces your monthly payments exactly.
Small debts – paying off small debts not only has an emotional value, but it also shows immediately in the ratio. Even a tiny step towards repayment can also have a positive impact on your total monthly obligations.
Step 4 – Avoid Taking on New Debt
While trying to improve your DTI ratio, avoid taking on additional loans or credit. Every new loan increases your monthly obligations and can negatively impact your debt-to-income. Delay big purchases or financing until after your DTI improves.
Step 5 – Consider Loan Consolidation or Refinancing
Refinancing or consolidation of loans that are already taken out is a common strategy that can be used to reduce your monthly debt payments. The solutions on hand are;
- Transfer of the balance credit cards – change high-interest cards to lower-interest ones
- Combining personal loans – the various debts shall be together credited as one loan, thus having a lower interest.
- Refinance for home loans – declaring an extension on your mortgage tenure may decrease the monthly EMI payments.
Moreover, decreasing the monthly payments automatically enhances the DTI ratio, along with the loan eligibility.
Step 6 – Review Your Credit Report
Just like a human’s life, credit checks can be a double-edged sword. Make sure all figures on all the accounts and payment behaviour are checked. If you find anything in the report that is not right or that you didn’t authorise, dispute it. Additionally, eliminate any late payments and return the amounts before the due date. Good credit is rewarded with the trust of the lender, and it is easier to get a loan then.
Step 7 – Build an Emergency Fund
Although most people find it hard to get a larger amount of cash-based savings, you can start by setting aside any amount that is comfortably within reach. At least you will feel like you are making some progress, and if this is too easy, then up to two or three per cent. You can also put this money into a sum of a mutual fund account or a life insurance policy, which will be less tax-efficient but could be a good enough first step.
Step 8: Monitor Your Debt-to-Income Ratio Regularly
Keeping up with the ratio, even though you have increased your debt-to-income ratio, not only takes care of what is at stake but also brings about the following advantages;
- Maintains stability
- Prevent a relapse to a high best situation
- Prevent oneself from future loans without panic
By utilising online DTI calculators, one can easily track the ratio at any time.
Tips for Maintaining a Healthy Debt-to-Income Ratio
- Pay bills on time
- Avoid unnecessary expenses
- Track income and expenses monthly
- Before applying for a new loan, recheck your DTI
- Seek professional guidance if necessary
Conclusion
Achieving a promising debt-to-income ratio is the key to the main factor in getting a credit with the most favourable terms. A combination of diminishing debts, rising income, and watching finances closely can lead to a significant change in the way you look at your ability to be approved for the loan and also in the long-term financial health.
