Getting a bank loan is not just about having a good CIBIL score or stable income. One key factor banks check before approving your loan is the DTI ratio, which stands for Debt-to-Income ratio. Many people are unaware of how much this number matters in loan approvals. Even with a good income and a strong credit history, the Bank can reject your loan if your DTI is high.
Let’s understand what DTI means, how it is calculated, and how to reduce it to improve your chances of getting a loan.
What is the DTI Ratio, and Why It Matters?
Debt to Income ratio (DTI) is a way for banks to measure whether you can repay your new loan, considering your existing financial commitments. It shows what part of your monthly income is already going towards repaying home loans, car loans, personal loans, and credit card EMIs.
If your DTI is low, you are using only a small portion of your income to pay off loans, making you a safe borrower. But if your DTI is high, it signals that you are already under a lot of debt and may be unable to handle more.
How to Calculate DTI Ratio Easily
DTI is calculated monthly using this simple formula:
DTI Ratio = (Total Monthly Loan EMIs ÷ Monthly Income) × 100
Let’s take a simple example to understand this better:
Suppose your monthly income is Rs. 80,000. You have a home loan EMI of Rs. 28,000 and a car loan EMI of Rs. 4,000. This makes your total monthly debt payments Rs. 32,000.
Now, use the formula:
DTI = (32,000 ÷ 80,000) × 100 = 40%
So, your DTI ratio is 40%. This is considered high, and many banks prefer a DTI of below 36%. If your DTI crosses this limit, your chances of loan approval drop, even if your credit score is 750 or above.
DTI Ratio vs Credit Score: What’s the Difference?
While your credit score (CIBIL score) shows your repayment history and credit behaviour, the DTI ratio tells the Bank if you can afford another loan.
- A Credit Score shows how well you paid your past loans
- DTI Ratio shows how much you are already paying from your income
So, even if your credit score is excellent, a high DTI ratio can make you a risky borrower. Banks might feel you are already stretched financially and may reject your loan.
How Banks Use DTI Ratio in Loan Approval
When you apply for a loan, banks follow a step-by-step process to check your eligibility. They look at:
- Your Monthly Income
- Credit Score
- Existing Loan EMIs
- DTI Ratio
If your DTI ratio is high, the bank might:
- Reject your loan application
- Approve a lower loan amount
- Charge a higher interest rate
- Ask for a co-applicant or guarantor
Banks want to make sure you don’t default. So, if they see that a big part of your income is already being used for EMIs, they hesitate to give you more credit.
What is a Good DTI Ratio?
Here’s a simple guide:
- Below 20%: Excellent – You will likely get a loan.
- 20% to 35%: Good – Still acceptable for most banks.
- 36% to 40%: Risky – Some banks may reject or limit the loan amount.
- Above 40%: High Risk – Most banks will reject your application.
How to Reduce Your DTI Ratio and Improve Loan Chances
If your DTI ratio is high, you still have ways to fix it. Here’s how:
1. Increase Your Income
- Take up freelance work or a part-time job
- Ask for a salary hike or shift to a better-paying job
- Start a side business if possible
When your income increases, the DTI ratio automatically improves because the percentage of EMI out of total income becomes smaller.
2. Pay Off Some Loans Early
- Try to close small loans first, like personal loans or bike loans
- If possible, prepay one or two EMIs of bigger loans
- Reduce your credit card balance to lower your monthly outgo
Reducing your total EMIs will directly reduce your DTI ratio and make you eligible for a new loan.
3. Avoid Taking New Loans Before Major Applications
- If you are planning to apply for a home loan, avoid taking new credit cards or personal loans
- This will help maintain a cleaner DTI ratio for the primary loan
4. Apply With a Co-Applicant
- Adding a co-applicant with income, like a spouse or parent, can help reduce the overall DTI ratio in the application
- Banks calculate combined income and debts in joint applications
Other Things to Keep in Mind
- Your credit report does not mention your DTI ratio — this is something banks calculate internally
- Even if you are paying EMIs on time, too many loans can hurt your DTI ratio
- Always check your DTI ratio yourself before applying for big loans
- Use online DTI calculators to get a quick idea
Final Advice
Managing your DTI ratio is as important as keeping a good credit score. If you plan to take a big loan — like a home or car loan — it’s better to prepare 3–6 months in advance by reducing debt and improving income. A healthy DTI ratio not only helps in getting loan approval but also helps in getting better interest rates and higher loan amounts.
Source: Zee Business
