Dubai: If your loan applications keeps getting rejected, despite having a good credit history, there may be a common reasoning as to why that is.
Your debt-to-income ratio, or simply known as debt ratio, is detrimental to lenders deciding whether to approve your loan application or not. And if your credit history is intact, but your loan applications gets rejected, in all probability it is because your ratio is low. But what is it exactly?
Your debt-to-income ratio is the percentage of your monthly income you must spend on your monthly debt payments plus the projected payment on the new loan. This is to check whether your current debt burdens increase or decrease your risk of taking on a new loan.
Generally, the lower your debt-to-income ratio is, the more likely you are to qualify for your loan, be it a mortgage, car loan or education loan.
As such, the DBR offers a clear picture of your financial health. Some banks may refer to it as your debt-service ratio or your income-to-installment ratio.
Expressed in mathematical terms: DBR = Total Debt/Total Assets.
In this case, the total debt is the sum of all your loan installments, any installment-based credit owed on your credit cards, plus 5 per cent of the total credit limit of all cards in your name.
Is that the only reason why loans get rejected?
“Yet, the reason (for rejection) may have nothing to do with you personally,” analysts at lender Citi noted. “Instead, it may have everything to do with whether you fulfill a certain set of criteria.”
Each issuer maintains its own list of measures against which all new credit applications are checked. These may include your income, credit score and debt burden ratio, but could also extend to your workplace, they added.
“To complicate matters, these factors may become more stringent during an economic slowdown (such as right now), the analysts at Citi further explained.
“So while you may not be told exactly why your application was denied, a quick look at some of these criteria against which applications for credit cards and personal loans are evaluated can help you understand how to improve your chances the next time around.”
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Do all lenders calculate this the same way?
Though all lenders calculate your debt ratio using the same calculation, there are others factors that affect their approval process in getting you a loan. Here’ show all lenders operate when they get your loan application.
Firstly, they add up the amount you pay each month for debt and recurring financial obligations (such as credit cards, car loans and leases, and student loans).
However, note that this doesn’t include your current home loan or mortgage or rental payment, or other monthly expenses that aren’t debts (such as phone and electric bills).
Secondly, add your projected mortgage payment to your debt total from the first step. Next, divide that total number by your monthly income. The resulting percentage is your debt-to-income ratio.
Money planners view that typically you'll want to keep it around the 30 per cent mark. Most lenders want your debt-to-income ratio to be no more than 36 percent, but some lenders or loan products may require a lower percentage to qualify.
Moreover, you can use freely-accessible online calculators to add up all of your monthly outgoings including your mortgage/rent and any other loans, credit card payments as well as any other recurring outgoings and it'll calculate your debt ratio against your monthly income!
How do I lower my debt-to-income ratio?
If you find your ratio is too high, consider how you can lower it. You might be able to pay down your credit cards or reduce other monthly debts.
Alternatively, increasing the amount of your down payment can lower your projected monthly mortgage payments. Or you may want to consider a less expensive home or car, or whatever it may be you are using the loan for.
You could lower your ratio by increasing your income, but some lenders may take into account non-traditional sources of income such as, stipends, or a trust income. If you have non-traditional sources of income, be sure to ask your lender about the availability of products and programs that include them.
In addition to lowering your overall debt, it’s important to add as little, or no, new debt as possible during the buying process, as this will affect your credit history.
Keeping your debt-to-income ratio low can help you qualify for a loan and pave the way for other borrowing opportunities. It can also help handle your finances responsibly.
How does my salary factor into all this?
While you may consider your salary to be a private matter, you’ll need to share it with your bank to establish a new financial relationship of any kind.
Each bank operating within the UAE requires applicants for credit cards or personal loans to have a minimum monthly salary.
Depending on the bank, this may be a minimum of Dh5,000 to Dh10,000. If you earn less than minimum salary amount, you may have to apply to another bank or consider other ways of meeting your financial obligations.
Therefore, it’s worth asking a bank representative about minimum salary requirements before applying for a loan or a card.
Does the place I work affect the result as well?
Your employer doesn’t just sponsor your work permit in the UAE, the company you work may also determine whether you are granted a credit card or personal loan.
If you’ve ever been told your employer is “not approved” or “not registered”, it’s probably because the company isn’t listed with the bank. Each UAE bank has its own list of employers or companies against which all new account applications are checked.
Banks do this to check whether your income or employment is secure, and whether your company is financially stable. Since the introduction of the Al Etihad Credit Bureau, these lists are now a little less important, but as a rule of thumb, large and well-known organisations are usually listed or registered.
If your employer isn’t on such a list, you can still ask the bank if they accept as some banks accept applications even if the company is not listed.
This is because they want to make sure you’re drawing a salary; someone outside this age range may not be earning enough to pay off a loan or credit card.
If you’re under 21 or over 65 years, then, your best bet is to seek other avenues of funding. Consider secured loans or add-on credit cards instead.