Unless you have stacks of money underneath your bed or gold bars in a securely guarded vault, the chances are high that you will need to apply for a loan to purchase a property or a car.
In Malaysia, the highest loan amount you can usually get is 90%. In rare cases, and depending on the financial institution or promotional loan, you may be able to apply for full financing – in other terms, a 100% loan.
When you apply for a mortgage or hire purchase loan, financial institutions evaluate your Debt Service Ratio (DSR) to determine your loan eligibility and if they want to offer you the loan.
If you have a bad DSR, banks might hesitate to offer you a loan. Hence, your DSR is important to determine if you can make that dream home or car yours.
What Is Debt Service Ratio (DSR)?
Debt Service Ratio is a calculation banks and financial institutions use to check if you can repay your loan. It is based on your monthly net income and total monthly debt or commitments, so they can evaluate if the loan you’re applying for is within your financial limits.
Different financial institutions have different DSR rates. When you apply for a loan with one bank, your DSR will be compared to their maximum DSR limit. For example, if Bank X’s maximum DSR is 40% and your DSR is 35%, you fall safely within their DSR range and are more likely to get your loan approved.
Besides DSR rates, the way to calculate DSR can also differ. Some banks use gross income instead of net income; some set the maximum DSR limit based on your monthly income, where if you earn more, your DSR limit will be higher.
As a rough guideline, it is ideal to maintain your DSR at 30% – 40% to qualify better for the loans you apply for. Of course, keeping your DSR within that range takes some work and financial planning, which we’ll explore after we learn how to calculate DSR!
How To Calculate DSR?
You can use this easy formula to calculate DSR:
(Total monthly commitments + Monthly car loan you’re applying for) ÷ Net income (after EPF, SOCSO, tax, etc.) = X × 100.
Total monthly commitments typically consist of things like repayment for your PTPTN, car loan, rental or property loan, and credit card.
Here’s a real-life scenario of how to calculate DSR:
Total monthly commitments:
- PTPTN: RM300
- Car Loan: RM400
- Credit Card: RM300
Total monthly commitments: RM1,000
Monthly loan you’re applying for: RM1,300
Net income: RM4,500
(RM1,000 + RM1,300) ÷ RM4,500 = 0.51 × 100 = 51% DSR.
What Affects Your DSR?
1. Unstable employment
Unstable employment can lead to an unstable monthly income, which financial institutions will consider risky because of the greater chances of the inability to pay the loan. Even if you get large sums of income now and then, you need to convince the bank you have a steady job and income.
2. Too many loans and repayments
If you often take out a loan or instalments on everything, it may backfire, as on paper, you have too many financial commitments. By adding another prospective loan to it, banks will be cautious about whether you can repay the loan.
3. Late payment records and bad credit
Being behind on your payments and not paying in full can affect your credit history and make you less credible for banks to lend you money. You may have the financial capabilities to repay the loan, but the question is, when?
How To Improve Your DSR
If you have an unsatisfactory DSR or you’re looking to clean it up better, here are some ways to improve your DSR.
1. Clear your debt
Start by reducing or clearing your monthly financial commitments, eliminating the ones you don’t need. If your credit card is the root of all evil – and debt – terminate it and use a debit card. Besides these, you can also consolidate your current repayments into one loan to save on interest.
2. Increase your income
Another alternative to widen the gap between your income and expenditure to improve your DSR is to get a pay increase. This stems from anything like getting a raise at work, taking up part-time jobs in your spare time, or investing in assets that can generate passive income.
3. Make your payments on time
Late and unpaid amounts can snowball into big chunks after a while, resulting in a sizable debt you must repay – which will be especially painful with high interest! Set a recurring reminder on your phone a few days before the payment is due so the financial institution can receive your payment on time.
4. Collect proof of income and repayment
Especially for freelancers or self-employed business owners, it can be challenging to prove your consistent flow of income. To solve that, collect and record all your proof of income and debt or loan repayments in one easy-access place. Keep digital and physical copies as well.
Don’t Skimp On Your DSR!
On top of your Debt Service Ratio, banks will also look into your credit score via CCRIS and CTOS to assess your creditworthiness when applying for a loan. After all, a loan is a big amount of money, and they will want to confirm you can repay it on time and in full.
If you feel your DSR isn’t decent enough, remember that every bank has its way of calculating DSR and their respective DSR ranges. Certain financial institutions may have stricter regulations, so always keep your options open and try again, or work hard to improve your DSR.