Hey everyone, I’m planning to apply for a loan soon just curious, what’s the right or safe debt-to-income ratio banks usually expect? And how much is too much debt?
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Firstly let’s understand how debt to income is calculated-
Formula= (Monthly debt payments ÷ Gross monthly income) x 100
In monthly debt payments we include all EMI’s, for existing loans, credit card payments, and any other recurring debt payments.
Gross income includes your total income before paying taxes.
Debt to income ratio less than 36% is generally considered good. It is excellent if your debt to income ratio is less than 20%, it means that your able to manage your debts. If it is more than 50% that have a negative impact and makes hard for you to get new loans through banks or financial institutions.
The ideal debt-to-income (DTI) ratio is usually around 30 to 40 percent. That means your total monthly loan EMIs should not exceed 30 to 40 percent of your monthly income. Banks use this to see if you can comfortably repay new debt without stressing your finances.
If your DTI goes above 50 percent, most lenders see it as risky. That much debt means you might struggle to pay in case of any income drop or emergency. For things like home loans, banks usually prefer DTI under 40 percent, especially if you’re already paying other EMIs like a car or personal loan.
So before applying, total up your existing EMIs and see what percentage of your monthly income they take up. If it’s too high, consider reducing some debt first to improve your loan chances and get better terms.