Debt-To-Income Ratio: What Is It and Why Is It Important?

A recent study found that only approximately 29% of American adults are considered financially healthy. A big part of improving financial health is paying off debt. Some people seem to think that the best way to obtain the little extras they need in life is by taking out loans or using credit cards. Debt-to-income ratio is vital to your financial standing.

While using credit or loans will help you buy something faster, it can also affect your financial health. When applying for any loan, one of the main things a lender will consider is your ratio. Below is information about this term and the importance of a low debt-to-income ratio. 

What is Debt-To-Income Ratio?

The term debt-to-income ratio is used to compare a person’s monthly gross income and their monthly debt expenses. If you want to calculate your own ratio, you will need a few basic pieces of information. 

Making a list of your monthly personal loan, car loan and credit card payments is the first step in this calculation process. Once you have the total amount of payments you are making monthly, you need to figure out your monthly gross income. 

You will then divide the debt payments you have by your income and that percentage is your debt-to-income ratio. Be sure you calculate your monthly income before taxes to ensure you get an accurate ratio. 

The Importance of a Good Debt-To-Income Ratio

When applying for a loan, the lender you use will consider many factors before approving your request. One of the main things a lender wants to know is how much debt you currently have. If your debt-to-income ratio is high, it will be difficult to get a loan for a significant amount of money approved. 

Calculating your ratio before applying for a loan can help you greatly. Most lenders will approve loans for applicants with a ratio of 36% or below. If your current debt-to-income ratio is higher than this, you may need to address this issue before applying for a loan. Avoid making money mistakes by applying with low ratio.

Great Tips For Lowering Your Debt-To-Income Ratio

Is your current ratio high? If so, it is time to do something about it. One of the first things you can do to lower this ratio is to pay off your outstanding debt. Most American consumers have around $3,000 worth of credit card debt

Regardless of how much debt you have, it is crucial to make a comprehensive plan to pay it off quickly. This is a good way to reach financial stability. You also need to avoid taking on any new debt until you get your current debt-to-income ratio down. By recalculating your ratio monthly, you can estimate how much progress you are making. 

Education is Power

The more you know about what lenders look for when inspecting a loan application, the easier it will be to get approved. By following these tips, you can lower your debt-to-income ration and get the funding you need with ease.

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