How to Calculate Your Total Monthly Debt Burden? – Unlocking the concept of debt-to-income ratio

It is essential for all to calculate their monthly debt burden to understand their financial standing. People traditionally calculated their debts in relation to their income by simply subtracting them from the total income. In current times, this method has evolved into the name 'debt-to-income ratio’. It adds up all your recurring monthly debt payments and divides that sum by your gross monthly income before taxes. In simple terms, it estimates your debt burden within the margin of your monthly income. Many banks or finance companies, like LoansJagat, estimate your debt-to-income ratio as one of the parameters before providing you with any financial services. 

Key takeaways: 

1. There are two ways to calculate your monthly debt burden: traditional calculations and the debt-to-income ratio. 
2. DTI acts as an important parameter in banks or financial institutions.
3. It gives the final picture of the financial handling, including your debts against your income.

What is the DTI ratio? 

The debt-to-income ratio (DTI) is a parameter that gives a final understanding of your debts within the ecosystem of your income.

The debt-to-income ratio is usually calculated using a formula, and if the final estimation is higher, then your debt burden is higher, and several banks or financial institutions can reject your loan request. On the other hand, if the final estimation is lower, then your debt burden is less, and you can benefit from several financial institutions. 

Disclaimer: The DTI ratio may vary from one bank to another. Each bank has its own policies and parameters, including DTI, to decide whether to provide services or not. There is no standard range; this can vary from bank to bank. 

These are the DTI ranges according to the banks in India: 

Here, we will be taking the example of Axis Bank to understand the concept of categorisation of DTI ratios. 

Hence, these are the ranges for DTI according to which people understand their financial position, and banks understand whether to provide financial services or not. 

How to use the DTI formula? 

The debt-to-income ratio calculates your monthly debt burden against your monthly earnings.

Formula of Debt-to-Income Ratio = (total debt payments / gross monthly income) x 100

For example, your monthly income is ₹30,000, and the total payments you make are a home loan EMI of ₹10,000, a phone EMI of ₹2,000, credit bills of ₹4,000, and a car loan EMI of ₹3,500.

This means your total monthly payments make up to = ₹2,000 + ₹4,000 + ₹3,500 + ₹10,000 = ₹19,500 from your total income of ₹30,000.

So, according to the DTI formula = (₹19,500 / ₹30,000) x 100

                                                     = (₹0.65) x 100

                                                      = 65%

This means your monthly debt burden is 65%, which is very high according to several banks' DTI margins.

What are the advantages of the debt-to-income ratio? 

There are several DTI advantages in terms of loan approvals, debt management, and better financing.

Here is the detailed explanation of the advantages of the debt-to-income ratio:

• DTI provides an overview of how much of your income goes toward fixed debt obligations. 

• DTI monitors help to lower the stress of high-interest loans, because it is one of the parameters that affect the loan approval

• It helps to understand the expenses, making savings goals easier. 

Hence, these are the advantages of the debt-to-income ratio. 

How to manage a high debt-to-income ratio? 

There are several ways to manage the high debt-to-income ratio. One needs the proper planning and understanding of the expenses to lower the DTI ratio. 

Here are the ways to manage the high DTI ratio: