Debt Service Ratio (DSR) is a crucial metric that financial institutions use to evaluate a borrower’s capacity to repay loans. Whether you’re an individual applying for a personal loan or an SME seeking funding for growth, understanding your DSR is essential to improving your chances of approval. In this article, we’ll break down what DSR is, how to calculate it, and why maintaining a healthy DSR is critical for financial stability.
What is Debt Service Ratio (DSR)?
DSR is a percentage that represents the proportion of a borrower’s monthly income used to service debt obligations. It helps lenders assess how much of your income is tied up in repaying existing debts and determine whether you have the financial capacity to take on additional borrowing.
A lower DSR reflects better financial stability and is typically more favorable for loan approvals. For most financial institutions, a DSR below 50% is considered ideal.
Steps to Calculate Your DSR
Calculating your DSR involves three simple steps:
Step 1️⃣: Calculate Total Monthly Debt Commitments
Begin by listing all your recurring debt obligations. This includes:
- Monthly loan repayments (e.g., personal loans, car loans)
- Credit card minimum payments
- Other financing commitments
For example, if you have a car loan repayment of RM1,000, a personal loan repayment of RM500, and a credit card minimum payment of RM300, your total monthly debt commitments amount to RM1,800.
Step 2️⃣: Calculate Total Monthly Income
Next, add up all sources of consistent income, such as:
- Your monthly salary
- Rental income
- Any other regular income streams
For instance, if your monthly salary is RM6,000 and you earn an additional RM1,000 from rental properties, your total monthly income would be RM7,000.
Step 3️⃣: Use the Formula to Calculate DSR
Finally, apply the formula:
DSR = (Total Monthly Debt Commitments / Total Monthly Income) × 100
Using the example above:
DSR = (RM1,800 / RM7,000) × 100 = 25.7%
This DSR indicates that 25.7% of your income is committed to repaying debts, which is well below the 50% threshold most lenders consider acceptable.
Why is DSR Important for Loan Approvals?
Lenders use DSR as a key metric to determine your eligibility for a loan. A high DSR suggests that a significant portion of your income is already committed to debt, making you a higher risk borrower. Conversely, a low DSR indicates better financial health and a greater likelihood of being approved for a loan.
To improve your chances of securing a loan, it’s crucial to manage your debts and maintain a healthy DSR. Check out Grand Capital Advisory’s guide on boosting loan approval odds for more insights.
How to Maintain a Healthy DSR
- Reduce Debt Obligations: Pay off high-interest debts or consolidate them to lower monthly commitments.
- Increase Income: Explore additional income sources to improve your income-to-debt ratio.
- Avoid New Debts: Limit taking on new debts, especially when planning to apply for a major loan.
For SMEs, maintaining a healthy DSR is even more critical when seeking funding for growth. Discover top SME loan options and how to unlock your potential with Grand Capital Advisory’s tailored services.
How Grand Capital Advisory Can Help
Navigating the complexities of DSR and loan approvals can be challenging, but you don’t have to do it alone. At Grand Capital Advisory, we specialize in providing financial solutions tailored to your needs. From debt management to securing funding through programs like the Government Guarantee Scheme Madani, our experts are here to guide you every step of the way.
