How do I calculate my Debt Service Ratio?


Applying a loan is not easy and is, in fact, a very long and tedious process. When your loan goes for approval, your debt service ratio is a major consideration. It is a strong decisive factor and you need to make sure it’s good to prove to your loan officers that you have good credit worthiness. Every record from your credit history to your occupation is taken into consideration too.

But what is debt service ratio (DSR), and how it can affect the loan approval?

What is Debt Service Ratio?

If you have ever applied for a carhome, or personal loan, you will probably have heard the phrase ‘debt service ratio’ from the bank’s loan officers when they explain to you how the loan works.

What exactly does it mean? Debt Service Ratio, or DSR, is a calculation used by the bank to check whether you can repay the loan.

Your DSR is usually compared against the bank’s maximum allowable DSR limit. If your DSR is within the limit, you stand a higher chance to receive the loan. Normally, the lower the DSR, the better the chance that you can get a loan approved. Best advice is you should always maintain the DSR within 30-40% range.

Do take note that a DSR limit varies according to individuals and their respective levels of net income.

How is Debt Service Ratio calculated?

Total Monthly Commitments / Total Monthly Income X 100% = Debt Service Ratio

The information used to calculate your debt service ratio take the form of these useful documents.

  • Monthly commitments
  • Monthly income
  • Payslip
  • Property rental yields
  • Personal loan instalment
  • Car loan instalment
  • Housing loan instalment
  • PRS Withdrawals (for retirees)
  • Credit card statements

These documents clarify and justify your current financial health and whether you are able to service a loan consistently. Take a look at the example below:

Let’s take a look at Joanne’s Financial Status:

Monthly Income: RM7,000

Currently has 3 loans: Personal Loan (RM1,000), Housing Loan (RM2,500), and Car Loan (RM500)

Total monthly commitment: RM4,000

Her debt service ratio would be calculated as:

RM4,000 / RM7,000 X 100% = 57.14%

With an income of RM7,000 monthly and a monthly commitment of RM4,000, Joanne has a debt ratio of 57.14%. As her monthly commitment is over 50%, she may find it challenging to get approved for loan even with a guarantor.

Tip: Ensure your monthly commitment do not exceed 33% of your income!

What can I do to improve my DSR?

  1. Reduce Your Debt! If you have debt from loans or unpaid debit cards, it is best you clear it up. One of the best ways to start is via the snowball method. Alternatively, you can also consolidate multiple repayments into one loan too, thereby simplifying your repayments into one; it saves on interest too.
  2. Minimize! Try to reduce the number of loans or credit cards in your name as much as possible. This is especially so if you are one who impulsively spends with a credit card.
  3. Always Pay On Time! Whenever your bills or credit card statements come, always pay it off 100%. What may seem like an unpaid small amount can stack up with the following months, resulting in a large debt monster.

Any other factors to assess my credit worthiness?

Yes, absolutely! CCRIS and CTOS reports can help bank to assess your credit worthiness.

CCRIS report shows your existing outstanding credit and application for credit that you made in the past 12 months, whether it was approved, pending, or rejected by the bank. CCRIS report also shows the capacity of borrowing that you took from the bank, such as sole proprietor, partnership, joint application or acting as guarantor.

CTOS report contains your full credit history, payment behavior, your CTOS score, directorship as well as business interest, litigation and bankruptcy. It is pretty much your credit health and score at a glance.

All being said, it is important to have some good debt to help build your credit score and also to have an excellent debt service ratio. This will make it easier for you when you are applying for financing plans or loans in the future.