Debt to income ratio is the calculation showing the portion of your monthly income thatis allocated to the payment of debts. This, together your credit score are the major factors that determine whether you will have access to a loan.This is the information that guides both you and the lender in figuring out whether you will be able to cover your monthly repayments.
This is how it is calculated
For you to be able to calculate debt to income ratio, all you need to do is sum up all your monthly debt repayments then sum up all your total monthly income then divide the two.Your monthly debt payments are essentiallyan aggregation of all the minimum payments from your income that go towards settling your loans.
What is meant by a good ratio?
The reason lenders insist on a good debt to income ratio is to ensure that as a borrower you can actually afford the loan you are applying for. It is in your best interests to be able to comfortably cover your repayments and avoid widening your debt burden. For most lenders, the debt to income ratio has been fixed at 36 per cent as a maximum, whereas others have it fixed at 55 per cent. It often varies from one lender to the other.It is generally advisable not to put too much strain on your debt burden by exhausting your debt to income ration.
This is how to improve your ratios
In the event your debt ratio is high, you have no option but to bring it down in order to be able to access loans. This can be achieved through paying off your outstanding debt, find a way of increasing your income, hold off on taking in more debt or plan to make a bigger down payment on your loan.
Make an effort to have better control over your finances as the less debt you have, the more money you have available for other things like savings, education as well as retirement.