Understand Your Debt to Income Ratio

By Angela Monroe - November 15, 2018

When it comes to figuring out all of the jargon around credit ratings and loans, you may have heard the term ‘debt to income ratio’. Don’t panic if you don’t know what it means. It’s a fairly simple calculation that can actually be really useful for you to figure out.

Lenders will look at your debt to income ratio when deciding whether to approve bad credit loans that you have applied for. The result of this calculation can also affect your credit rating.

Need help with jargon and lenders? Find out how we can help you with bad credit loans.

What is your debt to income ratio?

Sometimes known as DTI, debt to income ratio is a financial measure that compares your loan payment to your overall income. Lenders use this to measure your ability to make monthly payments and to determine how capable you are of repaying debts.

To calculate your debt to income ratio, you’ll need to know your debt load – this includes all the money that you currently owe such as student loans, mortgages, and unpaid credit card bills.

How is debt to income ratio calculated?

DTI (expressed as a percentage rate) is fairly easy to calculate. Lenders will simply divide the total recurring monthly debt that you have, by your gross monthly income.

If you have a low DTI, it shows that you’ve got a good balance between your debts and your income. However, a high DTI may be a warning sign to lenders that you have too much debt for your income and could struggle to make repayments.

Ideally, DTI should be below 36 per cent, with most mortgage lenders refusing to lend to borrowers with a higher DTI than 45 per cent.

Australia and debt statistics

Did you know that millions of Australians are currently struggling with debt? It’s always been common to have home loans, car loans, and personal loans, but there are more people who are struggling to make debt repayments on time and experiencing bad credit as a result.

Australia’s household debt to income ratio has hit nearly 200 per cent, which is one of the highest in the world. People are spending far more on household liabilities than ever before, with figures reaching trillions of dollars.

If you’re struggling with debt but are looking for bad credit loans, it’s really important that you contact us to get advice from a bad credit specialist who can help you to figure out the right loan for you. You’ll want to avoid high-interest loans or loans with hidden fees so you can get back on your feet financially.

How to improve your debt to income ratio

The good news is that you can improve your debt to income ratio. There are two main ways to do this:

1. Reduce your monthly recurring debt

This is the amount of debt you have which you are liable to pay off each month. Some of your debt may be unavoidable – such as a home loan which you are paying back over a number of years. Look at which debts you may be able to pay off quickly and eliminate completely – paying off credit card debts or avoiding any more personal loans will help to reduce your monthly debt and improve your debt to income ratio.

2. Increase your monthly income

The other way of improving your debt to income ratio – especially if you have bad credit – is to show evidence of a higher gross monthly earnings. Whether this means working extra shifts to increase your overall monthly earnings or taking on another part-time job, it could really help to improve your financial standing.

Can a loan help your debt to income ratio?

At Loans for People with Bad Credit, we understand that you may need to take out bad credit loans for a number of different reasons. Generally, a loan will not improve your debt to income ratio as it will add to your overall debt each month, which means your ratio will be less favourable.

However, a loan to consolidate your existing debts can help you simplify your debt and repayments. This can help you work towards improving your DTI. We have access to a wide range of lenders who specialise in bad credit loans and can help to set you up with the best loan for you.

Whatever your situation is, we can help you understand all your options for bad credit loans.

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.


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