If you have ever applied for a mortgage, car loan, or bank loan, you surely would have come across one term called ‘debt to income ratio’. In this post, we will learn what it is and its importance.

Debt to Income Ratio

A person’s debt to income ratio is all his debt payments divided by his monthly gross income. For instance, if you have three monthly debt payments: $2000 mortgage payment, $400 auto loan, $100 personal loan, then your total monthly debt payment is $2500. And if your monthly gross salary (that is your salary minus the deductions) is $25000, your debt to income ratio is 10 percent.

What’s the purpose of debt to income ratio?

This number is a marker of your loan repayment capacity, as far as banks and legal money lenders Singapore are concerned.

As an individual would you lend out money to someone who you think is not a good position to repay? Probably not. Well, banks work on the same principle. Before they approve a loan application, they check if the borrower has the capacity to repay.

Among different things which they check, one is the debt to income ratio. The lower it is, the better the repayment capacity of the borrower. If other things are fine, you should have no trouble in getting a loan if your debt to income ratio is good.

When does the ratio become unacceptable?

You are likely to find it very hard to get a mortgage loan or any other loan if your debt to income ratio is extremely high. It is possible that banks might have a different debt to income ratio cut-offs for different loans. It is also possible that it may vary from bank to bank. 

How to keep your ratio in check?

Here are some tips in this regard:

• Only take that much loan which you can repay – Personal loans are for short-term emergencies. If you want to go on a cruise holiday and don’t have the budget for it, take a holiday elsewhere or wait until you have sufficient money.
• Use your credit card judiciously – Credit cards make things easier, but only if you use them wisely. Don’t buy items with it that you can’t afford right now. Always make your credit card payments on time.
• Create a monthly budget and stick to it – It is important that you know beforehand how much you can spend and save every month. It would be much better if you can divide your monthly budget further, like so many dollars on entertainment, so many of clothes, so many on groceries, etc.

Do money lenders have the same level of restrictions as banks?

No, banks and other financial institutions are stricter than money lenders in running a background check on a borrower. However, this doesn’t mean that legal money lenders Singapore don’t do a credit check before giving a loan. They too can reject your loan application if they believe you are already neck-deep in credit and present a high risk of defaulting.