What is Total Debt Service Ratio?
What is Total Debt Service Ratio
Total Debt service ratio is a financial term which gives the lenders of the debt, an understanding of whether the borrower is capable of returning back the debt or defaulting depending upon the earnings or the income of the borrower.
Total Debt Service Ratio
Total Debt service ratio provides an understanding to determine the proportion to which the borrower is able to service or return back the debt to the lender depending upon the how much earnings and other obligation the borrower has.
A bank or a lending firm may eventually only provide debt to those firms or customers which show, a better past history of returning back their obligations within the considered period of time. A customer or a borrower with high debt service ratio may find it difficult to pay back his obligations on time as compared to the borrower with a low debt service ratio.
Total Debt service ratio = (Total debt payments) / Total Income
An individual wanting to buy a house may consider taking a loan worth 80lakhs; he may also be having other obligations to be repaid such as a car loan worth 8Lakhs and a personal loan worth 2Lakhs. Now if we consider his annual income to be 7Lakhs and income from other sources to be 3Lakhs.
Total Debt service ratio = (80L+8L+2L)/ (7L+3L)*100 (in proportion)
This comes to about 9:1, or in proportion to about 9% which is quite low and thus may get a consideration from the lender to qualify for the loan.
Different banks and lending firms have different process and percentages for qualifying the borrower to take up a loan. Generally, if the ratio falls below 43% the individual qualifies to take up the loan, but sometimes lending firms may even consider other factors such as goodwill, past experiences, stable income, growth, and stability of the firm or an individual, credit ratings etc.