Debt To Income Ratio
Debt-to-Income Ratio in personal finance is a comparison of your debt payment amount against your income. This ratio is best to be calculated on monthly basis.
It is calculated as below:
DEBT-TO-INCOME RATIO = TOTAL DEBT PAYMENTS(EMIs)/TOTAL INCOME
Lenders use it as a way to determine your ability to manage and repay the money you have borrowed.
Total Debt Payments is the sum of all your EMIs which can be of Home loan, Education loan, Auto loan, Personal loan, etc.
Total Income is the sum of your income from all sources such as salary, rental income, pension income, etc.
Example: If the total EMIs you pay per month is Rs.50000/-, and your total income per month is Rs.40000/-, then the Debt-to-Income Ratio is calculated to be 1.25. This means your monthly debt repayments exceed your income.
Ideally, this ratio should be below 1. It indicates that your income is higher than your debt repayments, and you can fund your living expenses easily. If the ratio is below 1, it means that you are living beyond your means.