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Calculating the debt ratio: what is it? How it works ?

Before taking out a consumer loan, it is advisable to estimate its maximum debt ratio. What is the debt ratio and how to calculate it, estimate it?

How to calculate / estimate your debt ratio?

The debt ratio plays an important role in obtaining or not a consumer credit , as well as the amount obtained. What is it exactly? How is it determined by credit agencies? And how do you calculate your debt ratio yourself?

An example to understand

If you borrow € 15,000 over 84 months at the fixed Global Effective Annual Rate of 3.38% (fixed borrowing rate of 3.33%)

You will reimburse 84 monthly payments of € 200.44 (excluding optional insurance) for a Total Amount due of € 16,836.96 (interest: € 1,836.96)

Monthly cost of the optional Death, Total and Irreversible Loss of autonomy, total temporary incapacity for work insurance (taken out with Cardif Life Insurance and Cardif various risk insurance) in addition to the amount of the monthly loan payment of € 19.02. Total cost of this optional insurance: € 1,597.68. Effective Annual Rate of this Insurance: 2.84%

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What is the debt ratio?

The debt ratio is an indicator that measures the share of monthly income that a household or borrower can devote to the repayment of its financial debts, the amount of the monthly payment overall (all loans combined) that it is able to support. This rate must include all debts contracted through bank loans (consumption, staff, work, automobile, and real estate), as well as other debts to relatives (pensions paid, etc.), to be also precise as possible.

Banking organizations use this rate to determine the level of solvency, and have the use of refusing the granting of a new loan to a borrower whose future debt ratio would exceed the 33% mark if ever a new loan is granted. had to be granted. The risk associated with exceeding this threshold is that the applicant is no longer able to meet his current expenses (food, clothing, energy, transport), the payment of his rent, or the repayment of his loans under good conditions.

How does the maximum debt ratio calculation work?

When applying for a personal loan , the credit institution is responsible for carrying out a study of the solvency of the household, by asking specific questions about the amount of its income and charges. It is within the framework of this study that the calculation of the debt ratio is carried out.

By charges, we mean all monthly payments debts you pay off each month, including any support payments. By income, these are your regular resources such as salaries, social assistance, rents if you are a landlord, retirement pensions, or alimony received, etc. It happens that some banks also include variable income such as bonuses or commissions.

If the rate obtained is less than 33%, the bank may agree to grant you a new loan provided that the monthly payment additional charge on top of existing charges does not exceed this threshold. But it still happens that a higher rate is accepted by credit organizations, as soon as the applicant has sufficiently high income, or a job guarantee helping to mitigate the risk for the bank.

Why carry out a simulation of its debt ratio?

Before submitting your request, it is useful to carry out a quick simulation of your debt ratio, in order to gain an overview of the chances of success of your project. Also, if the results show that you are currently far from the threshold, you may be able to consider borrowing more with your consumer credit or your work credit .

Maximum debt and over-indebtedness, what's the difference?

It is important to know that a bank's refusal to grant you new credit does not mean that you are in a situation of over-indebtedness. This negative answer just means that you are too close or that you have already reached the maximum debt accepted by this credit organization. Without it saying anything about your situation: it is possible that you repay your loans without the slightest incident, and that you experience a refusal anyway. Because you are simply exceeding the limits set by the bank.

Over-indebtedness is a totally different concept that refers to a household or a borrower who is already unable to repay their loans and assume the monthly payments existing. Generally, this means that he multiplies payment incidents, and that his debt ratio exceeds the threshold of 50%.

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