When applying for a Personal Loan, two key financial factors in determining Loan eligibility and repayment capability: interest rates and your debt-to-income ratio. Understanding their relationship helps you secure better Loan terms while maintaining financial stability.
What is the debt-to-income ratio?
The debt-to-income ratio is a portion of your monthly income that goes towards repaying existing debts. Lenders use them to assess your repayment capacity before approving a Personal Loan. A lower DTI ratio indicates strong financial health, increasing the chances of securing a Loan at competitive interest rates.
How Personal Loan interest rates and DTI ratio are connected
- Lower DTI ratio leads to better interest rates
A lower DTI ratio demonstrates financial stability and responsible debt management. Lenders may offer better Personal Loan interest rates to applicants with a low DTI, as they pose a lower risk of default.
- High DTI ratio can increase interest rates
If a significant portion of your income is already committed to debt repayment, lenders might perceive you as a high-risk borrower. This results in higher interest rates or even Loan rejection.
- Influence on tenure and EMIs
A high DTI ratio limits your ability to choose longer Loan tenures with affordable EMIs. On the other hand, maintaining a balanced DTI ratio helps negotiate flexible repayment options.
- Impact on credit scores and future borrowings
Your DTI ratio indirectly affects your credit score. A high DTI means financial strain, leading to a lower credit score and affecting your chances of securing favourable interest rates in future Loan applications.
How to improve DTI ratio and secure better Loan terms
- Pay existing debts
Reducing outstanding Loans, such as Credit Card dues or previous Personal Loans, can lower your DTI ratio and helps secure a lower interest rate.
- Increase income
Boosting your income through salary increments, freelance work, or other sources helps balance your DTI ratio, making you a more attractive borrower.
- Borrow what you need
Opt for a Loan amount that aligns with your repayment capability. Lenders offer customised Loan amounts based on individual financial profiles, ensuring affordability.
- Choose a lengthy tenure wisely
Extending Loan tenure can lower your monthly EMIs, improving your DTI ratio. However, this also increases total interest paid, so balance tenure selection carefully.
- Use an EMI calculator before applying
Lenders have online EMI calculators to help you determine the best Loan amount and tenure based on your current income and existing liabilities.
Conclusion
Your debt-to-income ratio and Personal Loan interest are closely linked, influencing your borrowing capacity and long-term financial health. Maintaining a low DTI ratio, repaying debts on time, and choosing a reputable lender with flexible terms can help you secure Loans at competitive interest rates while ensuring financial stability.
