Personal Loans: Three Other Ratios Banks Consider Besides Your Cibil Score
When applying for a personal loan, it’s common knowledge that you need a good Cibil score. However, banks don’t just look at your Cibil score when deciding whether to approve your loan. They also consider three other ratios. These ratios help banks assess your ability to repay the loan on time.
The three ratios are:
- Debt-to-income ratio (DTI)
- EMI/NMI ratio
- Loan-to-value ratio (LTV)
Debt-to-income ratio (DTI)
The DTI ratio is the percentage of your monthly income that goes towards debt payments. A lower DTI ratio means you’re more likely to be approved for a loan.
To calculate your DTI ratio, divide your total monthly debt payments by your monthly income.
DTI Ratio = (Total Monthly Debt Payments) / (Monthly Income)
Acceptable DTI ratios are typically between 30% and 40%.
For example, if your monthly income is ₹50,000 and your total monthly debt payments are ₹15,000, your DTI ratio would be 0.3.
EMI/NMI ratio
The EMI/NMI ratio is the percentage of your monthly income that goes towards the monthly payment of a new loan. A lower EMI/NMI ratio means you’re more likely to be approved for a loan.
To calculate your EMI/NMI ratio, divide the monthly payment of the new loan by your monthly income.
EMI/NMI Ratio = (New Loan Monthly Payment) / (Monthly Income)
Ideally, your EMI/NMI ratio should be 50% or less.
For example, if you have a monthly income of ₹50,000 and you’re applying for a personal loan with a monthly payment of ₹20,000, your EMI/NMI ratio would be 0.4.
Loan-to-value ratio (LTV)
The LTV ratio is the percentage of the value of a property that is being used to secure a loan. A lower LTV ratio means you’re more likely to be approved for a loan.
To calculate your LTV ratio, divide the amount of the loan by the value of the property.
LTV Ratio = (Loan Amount) / (Property Value)
Banks typically accept LTV ratios of 80% or less.
For example, if you’re applying for a loan to purchase a property worth ₹50,000 and the loan amount is ₹40,000, your LTV ratio would be 0.8.
Cibil score
Cibil score is a three-digit number that represents your credit history. A higher Cibil score means you’re more likely to be approved for a loan.
Cibil scores range from 300 to 900. People with Cibil scores of 750 or higher typically have an easier time getting approved for loans.
Benefits of a good Cibil score
There are several benefits to having a good Cibil score, including:
- Lower interest rates on loans
- Easier loan approval
- Pre-approved loan offers
- Increased chances of getting an instant loan
Drawbacks of a poor Cibil score
On the other hand, having a poor Cibil score can have several drawbacks, including:
- Difficulty getting approved for loans
- Higher interest rates on loans
- Higher insurance premiums from insurance companies
- Difficulty getting a home loan or car loan
- Delayed loan approval