Are you looking for a personal loan? As you must be aware, these are unsecured loans, which means they do not require any collateral. People take it for combatting any financial emergency. You can find a personal loan EMI calculator online to help you in calculating the total EMI you need to pay for a particular amount of loan. But, before going for another loan, you need to see your debt to income ratio.
What Is a Debt to Income Ratio?
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The Debt-to-Income (DTI), as it is referred to, is the ratio between the individual’s monthly debt payments and the total monthly income. It is a personal finance measure, which the lenders use to guess the individual’s ability to repay debt. To arrive at this ratio, one needs to divide the total recurring debt in a month with the gross monthly income and the outcome is expressed as a percentage. The gross monthly income is the total amount one earns before the tax or any other deduction.
Why Is the 43% Debt-to-Income Ratio Important?
If a person has too much debt to repay in a month, he or she is more likely to default. It is difficult to manage debt payments if it forms a considerable part of his or her salary. The studies tell that the highest ratio that a borrower can manage in a month is a 43% debt-to-income ratio. Anything over and above it will cause trouble, though the lenders often prefer a ratio of less than 36%.
How Lenders View Debt-to-Income Ratio?
For the lenders, a good look at debt-to-income ratios is very important. It helps them in analysing whether the borrower is in a position to take any more debt or not. If a person has a high debt-to-income ratio, then it raises concern. However, if one is going for a personal loan, then the creditors are more lenient. This is because many times the personal loan is taken to consolidate credit card debt. At times, some of the creditors can also give personal loans to people having debt-to-income ratios to around 50%. One can calculate the amount of EMI for a personal loan using a personal loan calculator. There is also personal loan eligibility calculator available in case you want to check that.
Does Debt-to-Income Ratio Impact the Credit Score?
If you see debt-to-income ratio on its own, it has no part to play in the calculation of the credit score. However, as it reflects your overall credit health, it can have a direct impact if you are applying for any major loan like mortgage. If the creditors find that your DTI is already above 40%, they will have genuine concerns about your repaying capacity if an additional financial obligation is taken. However, if a salary hike is already in place or you have a confirmed new job with higher pay package, you can convince them to pass your additional loan.
General Rule-of-Thumb for Debt-To-Income Ratio
DTI specifies how much debt you have and whether you can handle some more or not. Here are some basic thumb rules for this ratio.
DTI of Less than 15%: All lenders whether mortgage or personal will happily grant you more loans. In case you want to know how much interest you will pay on a particular amount of personal loan, you can make use of the personal loan interest calculator.
DTI between 15% and 43%: You should basically try to figure out how to cut down some of the recurring loans. If you are towards the higher end of this range and its primarily credit card debt, try to consolidate it. This is important in case you want to go for a mortgage loan in the near future. The creditors are usually not ready to grant any mortgage loan if your debt-to-income ratios hover above 40%
DTI of More than 43%: You should not go for any more loan because you have already breached the upper safe limit of your debt-to-income ratio. However, if you want to pay off some of this debt, especially the credit card one, you can opt for a personal loan. There will be some creditors out there who will be ready to grant it. You can use the personal loan calculator India to calculate the EMI amount and decide whether you can afford it or not.
The personal loan EMI calculator is a very good free tool to calculate the EMI amount. It tells you the exact amount that you will have to shell out month after month instantly. This helps in assessing the repayment capacity and thus plan accordingly. If you find that the EMI amount is coming out to be more than what you can afford, you can simply decrease the loan amount or increase the tenure – whichever is more practical. You can input different amounts and tenures in the personal loan EMI calculator and try to come to an EMI figure that you are most comfortable paying.
Additional Read- Benefits of SBI Personal Loan Calculator