DTI Ratio Explained: How a high debt-to-income ratio can lead to loan rejection & how to improve

When applying for a loan, most people focus on maintaining a good CIBIL score. While the CIBIL score is crucial, banks also consider other factors before approving a loan. One such factor is the Debt-to-Income (DTI) Ratio, which can significantly influence your loan application. If your DTI ratio is high, the bank may reject your request, even if your CIBIL score is excellent. Many are unaware of this critical element. So, let’s break down what the DTI ratio is and why it matters.

What is the DTI Ratio and How is It Calculated?

While a CIBIL score reflects how well you've repaid past loans, the DTI ratio assesses your ability to repay new loans. It is calculated monthly and helps banks determine whether you can handle more debt. To calculate the DTI ratio, the sum of all your current loan payments, including home loans, car loans, credit card bills, and any other existing debt, is divided by your monthly income.

For example, if your monthly salary is Rs 80,000 and your home loan and car loan installments total ₹36,000 per month, your DTI ratio is 45%. Ideally, your DTI ratio should be below 36%. A lower DTI ratio indicates a healthier balance between income and debt, which improves your chances of loan approval.

How to Improve Your DTI Ratio

Improving your DTI ratio involves either boosting your income or reducing your debt. Here are some strategies:

• Increase your income: Consider creating additional income streams, such as freelancing or a side business. Alternatively, you can negotiate a higher salary or look for better-paying job opportunities.
• Reduce your liabilities: Pay off existing loans as soon as possible to reduce your monthly debt obligations, which will lower your DTI ratio over time.

Maintaining a balanced DTI ratio is essential to securing loan approval. If you’re planning to apply for a loan, ensure your DTI is in check to improve your chances of success.