Your ‘debt to income’ is a good indicator of your financial health. Lenders will use your ‘debt-to-income ratio’ when considering your eligibility for a home loan or a personal loan. It can also be a good indicator for you to gauge whether your debt is under control.
Your debt-to-income ratio is your total debts and liabilities divided by your gross annual income (income before tax). This will indicate to lenders your ability to manage debt repayments based on your current financial commitments and your income.
Let’s look at an example of how a debt-to-income (DTI) ratio may be indicative to a lender. If you are a couple that both earn $70,000 per annum ($140,000 combined) and wish to take out a mortgage of $400,000, your debt-to-income ratio will consider the following:
The debt-to-income ratio will be: $433,000 / $140,000 = 3.09 DTI; this means that your total debt is 3.09 times your income.
Having a high debt-to-income ratio will directly influence your ability to obtain a loan. Typically, a high debt-to-income ratio is a 6, though different institutions may have different rules about what they consider to be ‘high’.
A low debt-to-income ratio is generally considered to be under a 3.6; a DTI under this amount demonstrates that you have the ability to successfully manage debt. If you have a low DTI, you will likely have more loan options and be offered a more attractive interest rate on your personal loan and home loan applications.
When calculating your ‘debt’ in the DTI ratio, the following financial institutions are considered:
A general rule, if you are unsure what factors will influence your ‘debts’, is that if it does not appear on your credit report, it will likely not impact your debt-to-income ratio. Your credit report details your credit history and provides lenders with a ‘credit score’.
The ‘income’ that is considered when calculating the ‘income’ of your DTI ratio includes:
If you have a high debt-to-income ratio, you may wish to improve your debt-to-income ratio before applying for personal finance or for a mortgage. To put it simply, to improve your debt-to-income, you must either reduce your monthly debt payments or increase your total monthly income. There are a few ways you may be able to do this. In order to decrease your debt repayments, consider the following:
To increase your income, consider:
Nifty Loans offers one of the fastest personal loan services in Australia. We are an online lender that specialises in speedy loans, which means that we can be lenient in terms of our eligibility requirements. Nifty Loans offers quick personal loans from $300 to $10,000 to Australians in need of some short term finance. We support instant transfers on approval; we are as close to an instant loan that you can find. If you are searching for affordable personal finance, Nifty Loans will have an option to suit your needs.Apply Now
Since founding Nifty in 2016, Bell has continued to make waves within the local financial sector for his continued ambition and willingness to adopt emerging technologies.Read More