The debt ratio is a mandatory condition of banks and credit institutions to grant you a loan. A calculation is carried out by these entities in order to check whether you have the capacity to support the repayment of a loan in addition to your daily expenses. Checking your debt ratio considerably optimises your borrowing profile with the lending institutions and protects you from possible over-indebtedness. To hope to obtain credit easily, it is important to understand the real stakes of the debt ratio. Find out the essential points to remember about this subject.
The principle of calculating the debt ratio
As introduced previously, the debt ratio defines the « percentage of your stable and recurring expenses in relation to your stable and recurring income ». As a result, many parameters are taken into account.
For income, industrial and commercial profits, net salaries, agricultural profits and non commercial profits are counted in this calculation. In some cases and depending on your situation, salaries, retirement pensions, alimony and life annuities following a divorce, family allowances, rents received and income from financial investments also contribute to the debt ratio.
As for expenses, this mainly includes current loans, pensions and annuities paid, rents remaining to be paid after the loan is set up, as well as the estimated monthly instalments of the loan requested are among the conditions for establishing your debt ratio.
To determine this percentage, the bank and the lending institutions gather the value of your expenses and compare it to your total income. Theoretically and usually, a debt ratio not exceeding 33% of income is accepted by banks. But exceptional cases may also exist with certain credit providers.
Another important criterion for banks is « living on borrowed funds ».
When putting together your credit application file, your situation is studied under the microscope by experienced financial analysts. The aim is to protect the bank’s interests against a possible non-payment on your part, but also to protect you from over-indebtedness. It’s a win-win situation for everyone. This is why banks only grant loans to people who have a suitable « living allowance ». To calculate it, you have to deduct all the expenses, used to calculate the debt ratio, from your total income. The result must be divided by 12 to obtain the monthly « remainder » for a household.
Banks have pre-determined scales for this to identify the right profiles for a loan.
How much can you borrow?
Following these small clarifications on the practices of the banks when granting a credit, you can now assess the amount of credit you can apply for. It’s relatively simple, especially when explained in this way. Now all you have to do is make the calculation yourself and take into account the different interest rates charged by the lending organizations. To find out all the rates on the market, you can use the online credit simulators. They are generally reliable and fast. All types of credit will be available to you if you meet all these basic criteria.