Facing Loan Rejection Due To A High Debt-to-Income Ratio? Here Are Tips To Improve It

When you apply for a loan, the lender will do various checks before it decides before you can repay the loan. It looks at your credit score, your repayment history, and also another factor known as the the debt-to-income (DTI).

DTI ratio is a financial metric that compares your total monthly debt payments to your monthly income. Lenders use it to evaluate your ability to manage cash flow and repay debt. “A lower DTI ratio signifies better financial health and increases the likelihood of loan approval. For instance, if your monthly income is Rs 50,000 and your total debt payments are Rs 20,000, your DTI ratio would be 40 per cent. Generally, financial institutions do not approve loans if the DTI exceeds 50 per cent, meaning only up to half of your monthly income can be allocated for EMIs,” says Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution, a loan distributor. 

If you face loan rejection due to a high DTI ratio, there are practical steps you can take to improve your financial profile. 

Prioritize Debt Repayment: Start by paying off smaller debts or high-interest obligations. This reduces your DTI ratio and positively impacts your credit score.

Avoid New Credit: “Resist the temptation to take on additional loans or credit cards while working on improving your DTI ratio,” says Sidharth Vishwanathan, Chief Risk Officer (CRO), KreditBee, a personal loan and online credit platform. 

Re-evaluate Loan Requirements: Opt for a lower loan amount or explore joint loan applications where applicable, as this can enhance your chances of approval.

Budget Smarter: Implement a strict budget to curb unnecessary expenses and channel more resources toward debt repayment.

Negotiate With Lender

You may also request lenders to extend the tenure of your existing loans, which can reduce EMIs and improve your DTI ratio. However, before proceeding, ensure you evaluate the long-term impact and seek advice from a financial planner if needed. 

Reassess Your Budget 

Lastly, reassess your budget, cut discretionary expenses, and redirect your savings toward debt repayment to enhance your financial health.

“Improving your DTI ratio requires consistent effort and discipline, but the payoff is significant—it enhances your financial health and opens doors to better credit opportunities,” says Vishwanathan.