What is the impact of personal loans on my debt-to-income ratio?

A personal loan has a direct effect on your debt-to-income (DTI) ratio, which is a highly important metric that lenders use to analyse your creditworthiness and repayment capacity. To calculate the DTI ratio, you have to divide your total monthly debt payment by your gross monthly income and finally multiply the result by 100. This figure provides a clear picture of how much of your income is already committed to servicing existing debts.

When you take a personal loan, your total monthly debt obligations increase, which in turn raises your DTI ratio. Lenders closely examine this ratio during the approval process, as it helps them assess whether you can comfortably manage additional debt. A lower DTI ratio shows that you have quite a good balance between your income and your financial commitments making you a more attractive candidate for new credit. On the other hand, a high DTI ratio implies that a good chunk of your income is already being used to repay debts, which may reduce your chances of getting approved for another loan or may result in less favourable terms.

Most financial institutions in India prefer to see a DTI ratio below 40% when considering personal loan applications. If your DTI ratio is particularly higher it can be beneficial to pay off some existing debts or consolidate loans to bring the ratio down before applying for a new personal loan.