Because taking out a home loan or car loan involves your finances over a long period, it is important that your debt ratio is below 33%. Banks consider that a higher level of debt poses a significant risk for them of default. And for you, a risk of debt, even over-indebtedness. So how do you calculate your credit debt ratio? Explanations.
Why calculate a credit debt ratio?
The notion of debt is essential when you plan to apply for a loan from a bank. Why? Quite simply because it allows the latter to assess the feasibility of your project by verifying that this loan will not lead you into a financially dangerous situation, even a situation of over-indebtedness. This calculation makes it possible to determine the total amount that it will be possible for you to contract in debts, but not only: in fact, the debt ratio also affects the interest rate on the credit.
Note that knowing how to calculate your mortgage loan debt rate, your consumer credit debt rate, or even your car loan debt rate, also has the advantage of having a precise overview of the reliability of your project. In addition, when you go to your bank advisor to apply for your credit, you will approach this interview much more calmly, since you will know in advance what you can claim.
But let’s go back: what is the debt ratio? It is simply the ratio between all of your expenses and all of your net fixed income, in other words the amount of expenses divided by that of income. This calculation measures the proportion occupied by the costs of a borrower in his budget. The debt ratio expressing the share of income devoted to loan repayments.
Depending on the results of this calculation, the authorized debt ratio can thus be increased or decreased. In the event that you have comfortable income, in other words with a high ” living income”, the bank will easily accept a debt ratio of over 33%, even going up to 35% or more. If you have more modest or irregular income, it will be difficult for you to obtain a loan representing more than 30% of debt. For households in difficulty it may even be necessary to count on the granting of a credit with a debt ratio of less than 25%!
Choose an acceptable debt ratio
Is there a threshold not to cross? Yes! There is no legal rule fixing the maximum debt ratio, that is to say the share of your income spent on repaying your loan. However, for a mortgage or a car loan, it is strongly recommended, as we have already mentioned, to limit or even decrease your debt ratio. In general, the banks consider that it is not reasonable to go into debt beyond 33%. Of course, this percentage is not a regulatory rate, however it remains the one most used by banks.
Note that the banks’ analysis of this risk is not based solely on the debt ratio. It is also based on the study of the profile of the borrower and more particularly on his “remainder to live” and his “family quotient”.
Calculate the debt ratio: the rule to know
If free debt rate calculators are easily accessible online (you just have to enter your figures and you instantly have the result in percentage) it is just as simple to perform the calculation yourself.
To calculate the amount you could borrow, here is the formula for calculating the debt ratio to know:
1. Add up your fixed income.
The fixed income taken into account to calculate the debt ratio are as follows:
- Net wages and contractual bonuses or 13th month.
- Non-salaried professional income received by farmers, traders, artisans and liberal professions.
- Alimony, retirement pension.
2. Count the charges:
- credits in progress;
3. Multiply the amount of expenses by 100, then divide the total by the amount of income. There you have your debt ratio.
To keep in mind: Debt ratio = amount of loan (s) × 100 ÷ net income
In most cases if the difference exceeds 33%, the credit organizations consider that this jeopardizes the financial balance of your budget and that your ability to repay will be uncertain. For many households, this leads to over-indebtedness.
Online simulation: if you choose to perform your calculation using an online simulator, you will need to enter your regular income and that of your spouse (wages, perceived rents, alimony, retirement pensions, allowances, aids social security) as well as your expenses (consumer credit in progress, pensions paid).
Calculate your monthly repayment capacity
What is your monthly repayment capacity? This is the maximum amount of the monthly payment that you can repay. It includes the loaned capital to be repaid, bank interest and the cost of borrower insurance (compulsory). If you apply a maximum rate of 33% of debt, here is how to calculate your repayment capacity: add your net income and multiply it by 33% then remove your current borrowing costs (sum of the monthly payments of the loans and the proposed loan).
To remember: repayment capacity = (net income × 33%) – (current borrowing charge)
The debt ratio: an essential indicator
In summary, the debt ratio is an essential indicator for knowing your borrowing possibilities. The calculation of your debt ratio by the bank (or by yourself!) Is none other than the calculation of your borrowing capacity to ensure that you will be able to repay your credit, only it is a mortgage, a car loan or a consumer loan.