Debt-to-Income Ratio: If your personal loan is getting rejected again and again despite having a good salary, it does not mean that the bank is not trusting your income. The real reason is often a single number – DTI Ratio (Debt-to-Income Ratio). This is the same meter which tells you how much of your income is already stuck in other debts. Banks use this number to decide whether you will be able to repay the new loan comfortably or not.
If you understand in simple language, Debt-to-Income Ratio (DTI) tells you how much of your monthly salary goes in EMI and how much is left with you. If this ratio is high, then banks hesitate in giving loan, no matter how good your income is.
What is DTI Ratio?
When you apply for a personal loan from a bank or fintech, the first thing that is seen is your total monthly liabilities. This includes all your existing loans – home loan, car loan, personal loan, consumer loan, buy now pay later (BNPL) installments and continuously recurring credit card minimum dues. By adding all these EMIs the bank compares it with your monthly income. For example, if your monthly salary is Rs 60,000 and total EMI is Rs 25,000, then your DTI is around 41 percent. This percentage tells you how much capacity you have to handle the new EMI.
Why do banks like low DTI?
Most banks in India consider DTI of 30–40 percent as a safe zone. Meaning, if you have 60–70% of your salary left, then the bank is confident that you will easily pay the new EMI. But as soon as your DTI crosses this limit, the bank feels that the new EMI may become a burden on you. In times of sudden medical expenses, temporary income gap due to job change, new responsibilities in the family or any unplanned big expense, an additional EMI can shake up your financial situation. Keeping this risk in mind, banks often avoid giving loans to people with high DTI, even if their income is much higher than the average.
Many people think that the salary is good, then why is the loan rejected?
The real problem is that EMIs and loans often silently eat up a major part of our income. Shopping from BNPL, minimum payment on credit cards, small consumer loans, the effect of all these gradually increases the DTI. Many people convert their credit card dues into EMIs or have installments running on more than one BNPL app. All these loans do not appear in your salary slip, but are recorded in detail in your credit report. Banks look at these together and decide whether the new loan will be safe or not.
DTI also affects loan amount
Even if the bank accepts your loan application, the amount you receive is often determined based on DTI. Banks offer higher amount, better tenure and sometimes even slightly lower interest rates to people with low DTI. Customers with high DTI generally get less loan than expected. Many times banks advise to stop any old EMI, only then you will be able to get a bigger loan. So the same person who thinks he should get a loan of Rs 5 lakh, gets an offer of only Rs 1.5–2 lakh, simply because the DTI is not in his favor.
How can DTI be reduced?
The good thing is that DTI is not a permanent problem. This can be rectified quickly with a little planning.
- Eliminate small loans- If you have 2-3 small personal loans, eliminate them first. DTI will improve immediately.
- Pay off credit card dues – The habit of paying minimum dues badly spoils DTI. Try to repay the full amount.
- Close unused BNPL accounts – Many BNPL apps remain active in the background and may show liability in reports.
- Apply after salary increases – DTI automatically reduces as income increases. The possibility of loan also increases.
- Wait for the tenure of an old loan to end – once an EMI ends, your DTI will come down and getting a loan will become easier.
Like credit score, DTI is also important
Many people consider credit score to be the most important, but from banking point of view, DTI is equally important. Credit score reflects your credit history, while DTI reflects your current financial capacity. By combining these two, banks decide whether you will be able to handle the new EMI or not. So, if you want your loan to be approved immediately when you need money, always try to keep the DTI around or below 40%.
