Debt ratio: understand it, calculate it
At the time of contracting a consumer loan, the issue of borrowing capacity arises for lending institutions. They calculate the debt ratio of the credit applicants to check their repayment possibilities. A process to do yourself upstream to better refine its credit application.
What is the debt ratio?
The debt ratio makes it possible to determine the financing capacity. In concrete terms, the income and expenses of loan applicants are analyzed in order to assess their ability to repay their monthly payments. Expressed as a percentage, this financing rate gives banks a valuable index. Beyond a certain level – usually one-third of revenue, assigning a loan can be considered too risky. This means that the bank believes that the borrower does not offer all the guarantees for repayment of principal and interest over time.
How to calculate the debt ratio?
Here is the list of revenues to consider when calculating borrowing capacity:
– monthly net salary;
– contractual premiums;
– 13th or 14th month;
– professional income for tradesmen, liberal professions, farmers and artisans;
– alimony subject to a court order;
– any other long-term pension.
Depending on the situation and the funding agencies, other income may be considered to calculate the debt ratio:
– family allowances and housing benefits;
– income generated by the rental of real estate;
It should be noted that an exceptional bonus or any professional allowances will not be able to integrate the estimated revenues by the financing organizations.
There are also charges to be included in the calculation of the debt ratio:
– rent and / or mortgage credit;
– consumer loan in progress;
– car credit;
To calculate the debt ratio, it is therefore sufficient to perform the following operation:
(Monthly charges / Monthly income) X 100
The result, expressed as a percentage, indicates your level of indebtedness in relation to your income. If this rate reaches 33%, most lenders will consider borrowing capacity too limited. On the other hand, some banks are more flexible on this psychological threshold.