What it is
The debt-to-income (DTI) ratio measures how much of your income goes toward paying debt, expressed as a percentage. This is one factor that lenders consider before approving a loan.
To calculate, simply divide your total debt payments by your total income within a specific period. DTI is often calculated on a monthly basis. Take this scenario for example:
- Total monthly income: P50,000
- Monthly personal loan payments: P2,000
- Monthly housing loan payments: P10,000
Debt-to-income ratio = P12,000 (total monthly debt payment) / P50,000 (total monthly income) x 100
The ratio is 24%. This means that in this scenario, 24% of the monthly income goes toward paying off loans each month.
A low ratio shows that you likely have enough income to cover debt payments on top of your other needs and obligations. A high ratio could indicate that you have too much debt given the amount you’re earning.
What it means for you
This ratio affects any person or entity that has loans or wants to apply for one. Here’s why it matters to both individuals and organizations:
- For individuals
Knowing your DTI can help you assess your financial health. It can tell you whether your loan payments are manageable given your other expenses or if you need to find ways to lower your debt.
Lenders may set a maximum DTI criterion for certain loans. Borrowers with the ideal ratio have higher chances of paying their loans on time, making them more attractive to lenders.
- For businesses and organizations
One way to check the health of a company or organization is by looking at its debt levels. Before investing in a company, it helps to compare its debt with its income.
This will give you an idea of whether the company has taken on a lot of debt. Very high ratios can affect a company’s profitability and put it at risk of defaulting or even bankruptcy.
Keep in mind that, aside from DTI, lenders also look at other factors such as your credit score to see if you’re qualified for a loan.
