08 Oct How to Calculate Your Debt-to-Income Ratio

Posted at 14:27h in Latest News by

Have you ever wondered how to calculate your debt-to-income ratio? You can calculate your DTI (debt-to-income) ratio using the formula DTI ratio = total monthly debt ÷ total gross monthly income x 100. Calculating your debt-to-income ratio is important for understanding the loans you’ll most likely qualify for, your financial standing, and how creditors view the risk of lending you money.

In this post, we’ll discuss what a DTI is, how to calculate it, what to do if you have a high DTI, strategies for reducing your overall debt-to-income ratio calculation, and how debt review will help you combat too much debt (what makes you eligible for debt review).

What’s a Debt-to-Income Ratio?

Your debt-to-income ratio is a metric lenders use to assess your creditworthiness. Typically, the higher your DTI, the lower your chances of qualifying for credit. It compares your monthly debt repayments to your overall monthly income.

You can calculate it by dividing your total recurring monthly debt by gross monthly income (total income from all sources, including returns, discounts, and allowances, before deducting any expenses or taxes).

Lenders use this metric to gauge how able you are to repay debts. In most cases, 43% is the highest DTI you can have to still qualify for a mortgage according to debt trends in South Africa. Usually, lenders prefer a DTI under 36% that goes to an existing mortgage or rent payment. You can reduce your DTI by lowering monthly debt payments or increasing your income.

How Can You Calculate Your Debt-to-Income Ratio?

First, calculate how much you pay in debt each month. Add your:

  • Mortgage/bond
  • Auto loan/car repayments
  • Student loans
  • Personal loans
  • Credit card loans
  • Any other debt

Then, calculate your monthly gross income. This is the salary before tax. Include all sources of income, including your salary, side hustle income, passive income (like rental income) or money from another job.

Then, divide your debt by gross income. This should give you a decimal. Multiply the decimal by 100, and you’ll get your DTI.

Example

Anna makes R10 000 a month at her desk job and babysits on the weekends to make an extra R1 500. Her gross income is R11 500.

She makes monthly car payments of R1 500 and personal loan payments of R500.

If we divide her debt (R2 000) by her gross income (R11 500), we’ll reach the decimal 0.17391304347, which for simplicity’s sake we’ll round to 0.18.

If we multiply 0.18 by 100, we’ll see that her DTI is 18%.

What If My DTI Is Higher Than 43%?

If more than 43% of your income goes toward debt repayments, you’re getting dangerously close to being over-indebted.

If your debt makes up more than half of your income, you’re likely struggling to afford minimum repayments or living expenses. The answer? Debt review.

Debt review is a debt help system wherein a debt counsellor negotiates with your creditors for lowered debt repayments and interest rates. As soon as you apply for debt review, you’re automatically protected from legal action and losing your assets while saving on debt repayments. You’ll also gain access to a personalised payment plan, budgeting help and financial advice to stay financially fit.

The process lasts for 3-5 years. After you’ve repaid your debt, you’ll get a clearance certificate you can submit to the credit bureaus to expunge the flag from your credit profile. Then, you can start rebuilding your credit, and eventually, apply for credit and use it responsibly.

How to calculate your debt-to-income (DTI) ratio

 

What Are Strategies for Reducing Your Debt-to-Income Ratio?

To reduce your debt-to-income ratio, you should increase your income or reduce your overall debt.

How to Increase Your Income

There are various strategies you can employ to increase your income, including:

Start a Side Hustle

Some ideas for a side hustle include starting a business with industry knowledge you already have, childcare (like babysitting or tutoring in what you studied), renting out a house you own or subletting with your landlord’s permission, getting a second part-time job, working online in the evenings (doing copywriting, virtual assistant work, translation, transcription, etc.), or investing in low-risk, high performing stocks.

How to Decrease Your Debt-to-Income Ratio

To decrease your debt-to-income ratio, you should focus on reducing your overall debt.

Snowball Method

This debt repayment method involves starting with repaying small debts to build momentum and motivation to pay off larger debts. This reduces the intimidation of your overall debt amount.

Avalanche Method

The avalanche method involves starting with debts that carry the highest interest rates. If you pay off debts with the highest interest rates first, you’ll avoid accruing more unnecessary debts.

Debt Review

If you have more debt than you can afford or find yourself taking out loans to afford daily living expenses or loan repayments, consider debt review. This is a legal debt help system means of negotiating with creditors to reduce interest rates and repayments while providing legal protection.

If you need help with over-indebtedness, contact True North Debt. We would love to help you regain financial agency!