Ever been turned down when you applied for a loan from a financial institution – even when you meet all the physical criteria? Your Debt To Income Ratio could be the reason why.
DTI or Debt to Income Ratio is the difference between securing a loan or being denied. Your DTI determines how much lenders will be willing to give you AND helps you be aware of how much you owe creditors.
As an individual, your DTI represents the total amount of debt you owe compared to your income. If you are a business, DTI may not apply but Debt To Assets (DTA) ratio will. We’ll dwell more on DTI here.
Find out how to calculate it here in this post.
Financial service providers like finance companies, credit facilitators, commercial banks, and anyone giving you a loan will always take a look at your debt to income ratio in order to determine how much they’re willing to lend to you. In a nutshell, your DTI is what determines whether you get millions from a lender or whether you don’t get a dime.
Still sounds confusing? Ok, let’s break it down.
Let’s assume there’s a guy that stays in the flat opposite yours, his name is Lekan and he hasn’t been employed recently. So, one day Lekan asks you for ₦10k to sort out something urgently. You check your purse and there’s actually ₦10k that you can spare.
You are about to dip your hand and about to give him the money, then a couple of questions pop in your head;
- Do I trust this guy?
- Will he pay me back?
- Is he capable of paying me back?
- Who knows why Lekan even needs this money?
With the myriad of questions running through your head, you still have a spot in your heart that says “well let’s give him the benefit of doubt.”
And then just as you are about to bring out the money, a third guy (John) walks in and tells you that he lent Lekan some ₦50k over three months ago, and the guy has not repaid. What will you do? You’d just put down your purse and move on.
Now that’s the debt to income ratio. You’ve quickly calculated Lekan’s ability to pay back the money he requested and you are not convinced.
This is what happens every time someone fills a loan form. They run a check on you to see how much of debt you have and how much you earn, they weigh both to see how much they can trust you or not.
If you plan on ever getting a loan, either for personal use or for your business, you need to make sure that your DTI is in check. As an individual, your DTI would compare your gross monthly income to your monthly debt.
Financial service providers and other lenders look at this number to determine how much of a risk you are to lend to. The more of a risk you are, the less of a chance they’ll lend to you at all.
We see cases all the time when customers request for loan amounts that are higher than their monthly debts. No organization will approve such loans, because the provider wants to be sure that they can collect their money back with the interest accrued – without any hassle.
One good news is that you can calculate your DTI and take strategic steps to improve and keep it in check.
Here’s how to do that:
Debt to income ratio = Amount of monthly debt you owe (in naira) / Amount of monthly income (in naira)
To get DTI in percentage;
Debt to income percentage = debt to income ratio X 100
If you’re like many, you’d be better off with a mathematical example, so let’s see one.
DTI calculation example:
Let’s say you owe some monies such that you need to make a monthly repayment of ₦32,000 and you earn ₦200,000 monthly. Then we’d take your ₦32k debt and divide it by ₦200k
Your DTI = ₦32k/₦200,000 = 0.16
Multiply 0.16 x 100 = 16%. Now, what does this number mean?
What’s a good Debt to Income Ratio?
The lower the number is, the better. According to Wells Fargo, the ideal debt to income ratio is 35 percent and below. That said, most lenders will provide you a loan up to 40-43 percent depending on other factors they may choose to look at.
So, if your debt to income ratio amounts to 16 percent like in the example above, you’d be in good shape for a loan.
If your debt to income ratio is a little higher and you want to lower it, you should start by reducing your monthly debts and increasing your monthly gross. Often times, this is not a very easy strategy to set for oneself which is why you may need to speak with experts.
Financial institutions especially those specified in lending normally have financial experts that can help you get started on your journey to having a good debt to income ratio, a DTI that financial institutions will actually love to lend to.
A simple google search can help you find some, or you can also reach the experts at Page Financials directly on 016317243 or send an email to email@example.com. You can also visit www.pagefinancials.com to get more information.