Total Monthly Commitments / Total Net Monthly Income X 100% = Debt Service RatioIdeally, you should always keep your debt service ratio below 60% to ensure you have the best chances of getting your loan approved. You should also keep in mind that banks may calculate the interest based on the total amount, the loan tenure and your credit score.
Now, do note that this is just the interest per installment, no matter how much you have paid down on your principal loan amount. Logically speaking, your monthly installment of your loan amount of RM50,000 should be RM834 per month (RM50,000 ÷ 60 months). Combining both of them (RM833 + RM292), you’ll be paying RM1,125 per month for your loan repayment over the period of 60 months (5 years). This means you are paying RM292*60 in interest. Because the RM292 does not change during the duration of the loan, while you are paying down, while the principal amount goes down, the actual interest rate calculated over the amount you still owe the bank is higher than this ‘flat’ interest rate.
- (Original Loan Amount x Number Of Years x Interest Rate Per Annum) ÷ Number Of Installments = Interest Payable Per Installment
- Say for example, you’re taking out a personal loan of RM50,000 with a flat rate interest of 7% over 5 years. This would be your flat rate interest per installment calculation:
- (RM50,000 x 5 x 7%) ÷ 60 = RM292
Total Monthly Commitments / Total Monthly Income X 100% = Debt Service RatioFor example: Rosie has a net monthly income of RM6,000 and is currently servicing two personal loans and one housing loan that cost her RM4,000 every month.
RM4,000 / RM6,000 x 100% = 66.67%