April 25, 2019
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 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.
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.
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.
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.