When you apply for a loan, you might wonder: “How much can I borrow from the bank?”. According to you repayment capabillity, you can estimate the amount of your loan.

The Debt Service Ratio(DSR), is a formula to help banks determine if you can repay the amount that you borrow.

What is the Debt Service Ratio (DSR)?

The DSR assesses your debt and credit obligations before comparing them to your income. They will be able to assess how much of your income is going toward debt repayment and whether you can afford to take out a new loan based on your earnings.

Lending institutions, on the other hand, will have their own internal algorithms and differing perspectives on what constitutes an acceptable percentage. Most of the time, the rule of thumb is that your debt should not exceed 60 percent of your entire net income.

DSR Calculation:

You can calculate your own DSR to see how likely you are to borrow money before going to the bank.

Even if your estimate differs slightly from the bank’s, you should be able to get a clear indication of where you stand.

Follow the instructions below to try this calculation for yourself.

1) Account for all your income and expenditure

Salary stubs and EPF statements are required to confirm the income you enter here to the bank. Many banks are hesitant to accept payments for freelancing work or rental yields that are not well documented.

You can try to include these by providing as many corroborating papers as possible. However, it’s best to stick to simple income receipts.

2) Apply the DSR formula on calculation

The calculation is quite straightforward. Apply the ratio of the total expenditure to the total income and you will get your Debt Service Ratio.

DSR Formula = Total Financial Commitments per Month/ Total Financial Income per Month

Bank usually tend to accept a DSR below 60%. Thus, if the sum of the DSR is lower than 60%, the maximum monthly instalment a person can pay sums up to the amount. Furthermore, the bank will proceed to adjust a new loan amount and tenure to match the remaining DSR.

What are the other factors of loan amount?

Additional criteria, such as a large net worth or professional employment level, may raise the maximum permissible DSR. If an applicant works for the government or in the civil service, the bank will generally assume that the job is secure.

These factors can help an applicant advance, but they can also slow down their progress. For example, when your income is not steady, even if it is considerable, the bank may be hesitant to provide you a loan.

Other considerations, such as your paymaster’s background and your industry of employment, will influence how the bank views your application.

What if the loan fails?

Don’t be discouraged if a bank denies your loan. It is because not all banks apply the same calculations or give the same weight to the other contributing criteria.

Try a different bank. If you fail after a few tries, give the application procedure some time try to pay off your debts and reapply when your financial situation is better.

For a look at all the greatest prices and a shot at different institutions depending on your circumstances, check out our home loan, personal loan, and vehicle loan calculators on LoanPanda.

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