Debt to Disposable Income Ratio
Debt to Disposable Income ratio helps you to understand how well you will be able to service your debt without compromising on your lifestyle. It is mostly measured as a monthly metric by comparing your debt to your monthly disposable income.
This ratio is used by lenders such as banks and NBFCs to screen potential borrowers who are at high risk of default.
It is calculated as below:
DEBT TO DISPOSABLE INCOME RATIO =
= TOTAL MONTHLY DEBT REPAYMENTS /TOTAL DISPOSABLE INCOME
Example: If your monthly net income is Rs.1 lakh and your living expenses are Rs.60,000/-, then your monthly disposable income is Rs.40,000/-. If your total monthly EMIs add to Rs.25,000/-, then the ratio will be 0.625. It means you can easily pay your monthly EMIs without compromising on your lifestyle and still have Rs.15,000/- as surplus.
Lenders assume that you would utilize your disposable income to service your debt. This also indicates your creditworthiness as lenders would check this ratio before issuing fresh debt.
If this ratio is greater than 1, it indicates that your disposable income is not enough to service your debt repayments/EMIs, and you may have to compromise on your lifestyle. If it is less than 1, it indicates that you have sufficient disposable income to service your EMIs.