Obtaining a consumer credit is done according to the means of the borrower. To know if an individual can take out a personal loan and how much he can borrow, he must know his debt ratio. This value, expressed as a percentage, makes it possible to estimate the amount of monthly payments that can be envisaged. The debt ratio is calculated taking into account the income and expenses of the borrower.  

What is the debt ratio?

What is the debt ratio?

The debt ratio is the portion of a borrower’s monthly income that can be used to repay a loan. The debt ratio therefore makes it possible to adjust the repayment period of a consumer credit, according to the amount of the monthly payments. In general, banks or lending institutions consider that for a mortgage, the debt ratio should not exceed 33%, so that the borrower is not in a situation of over-indebtedness. For a consumer credit, a margin of tolerance may be applied because the sums involved are much smaller. In this case, the bank or credit institution can tolerate a debt ratio of up to 50%.  

But this is not an absolute rule. The debt ratio may vary according to the income and other income of the borrower, but also according to his remaining life. 

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In terms of mortgage lending , lenders are less reluctant to exceed the 33% quota when facing borrowers in “safe” jobs (for example, public service jobs). 

What is meant by “rest to live”?

What is meant by "rest to live"?

The remainder is the amount available to the borrower after all expenses have been paid. It must be large enough to cover current expenses (clothing, hygiene, transport, food …). This is a key indicator for assessing the household’s standard of living, and thus the borrower’s debt capacity. 

If it is possible to calculate the rest to live, there is no rate or reference amount. It all depends on income! A fundamental rule must be taken into account: the lower the income, the higher the living income must be. But in order to measure the real amount that can be spent on the repayment of a loan, the ideal remains to be based on the calculation of the rate of

The method of calculating the debt ratio

The method of calculating the debt ratio

 To know its debt ratio, it is enough to apply a mathematical formula: 
•  It is necessary first to add the incomes and those of the co-borrower (salary, unemployment benefits, RSA, pension …), the annuities or even family allowances, to know the cash receipts of the borrower; 
•  Then you have to calculate the expenses, that is to say all the regular and incompressible expenses. They include credits already in progress, alimony paid, taxes or rent, for example; 
•  Finally, multiply the amount of the expenses by 100, then divide the total by the amount of the cash receipts to obtain the debt ratio.

Example:

 For 2500 € of income, and 500 € of expenses, the calculation of the debt ratio is: (500 x100)/2500 = 20%

With a debt ratio of 20%, the borrower can still devote about 13% of its income to a new loan or 325 € monthly. 
To facilitate the calculation of the debt ratio and to accurately determine its borrowing capacity, it is best to use a simulation tool.

Calculation of the debt ratio: how to revise its estimate downward?

Calculation of the debt ratio: how to revise its estimate downward?

A borrower with a current loan, or several, and who would not be eligible for a new loan because of a debt ratio too high, has the opportunity to review the latter down. How? By using the redemption of credits! 

Still called credit consolidation or debt restructuring, the redemption of credits consists in grouping two credits (or more). We distinguish : 

  • The purchase of consumer credit, which concerns all types of credit conso;
  • The repurchase of mortgage credit, which aims to group credit of different nature: the mortgage and consumer credit.

A loan buyback operation gives rise to a single monthly payment, much lower than the cumulative monthly payments of the various credits in progress. We are talking about 20 to 60% decrease. A considerable rate! Result, after a recalculation of the debt ratio, we realize that we pass happily under the fateful rate. The risk of over-indebtedness is removed, the purchasing power increases, which allows the borrower to contract a new loan despite its debt. 

For calculating your debt ratio or simulating your credit buyback, count on Creditstair! Whatever your project and level of indebtedness, our platform, specialized in collaborative credit, accompanies you in your steps and gives you the best rates.

The three key points to remember about the debt ratio and its calculation

The three key points to remember about the debt ratio and its calculation

  • The formula for calculating the debt ratio is as follows: (expenses x 100) / cash receipts.
  • Except in the case of significant income and other livelihoods, this rate must not exceed 33% for a mortgage, in order to avoid situations of over-indebtedness.
  • The repurchase of credits makes it possible to drastically reduce the debt ratio.