Are you in the process of requesting a loan from a financial institution in Barbados?
If you are then you should take the time to understand what bankers mean when they say your Debt Service Coverage Ratio (DSCR) needs to be calculated. Its a key ratio which helps Banks determine if you could afford to repay the loan facility you are requesting. But how is it calculated?
DSCR is calculated by totaling all your monthly loan commitments (e.g. credit cards, unsecured loans, hire purchase loans, land loans and mortgages) and then dividing this figure by your Gross Monthly Salary.
With credit cards usually Banks use 5% of the credit card limit to determine what is the minimum amount of funds you will need to repay monthly. It does not matter what your outstanding balance is on the credit card – the limit of the credit card is used to determine your minimum monthly commitment.
Your Gross Monthly Salary is the amount of funds your are paid monthly before any deductions are subtracted such as PAYE and NIS.
Lets look at an example of a customer called John Doe # 1. In this scenario the customer is requesting an unsecured loan with a monthly payment of $450. Consideration needs to be taken of his existing loan facilities to determine if he can qualify for this additional loan:-
John Doe # 1
Monthly Gross Salary $5,000
Loans:
Proposed Unsecured Loan monthly payment is $450
Credit Card Limit $3,000
Hire Purchase Account $50 monthly
Based on the information above John Doe #1’s DSCR will be 13%. See calculations below:-
- $450 + (3,000 * 0.05 = $150) + $50 / $5,000 = $650/ $5,000 which equates to 13%
Now if the Bank you have chosen to approach requires that their customers DSCR be below 40% – as is customary in Barbados – then this will mean that your DSCR is acceptable.
Now what if John Doe’s situation was a lot different? Let us see another example. The customer is requesting the same unsecured loan facility but he has an additional mortgage payment that needs to be taken into consideration when analyzing his DSCR:-
John Doe #2
Monthly Gross Salary $5,000
Loans:
Proposed Unsecured Loan monthly payment is $450
Mortgage Facility $1,500
Credit Card Limit $3,000
Hire Purchase Account $50 monthly
Based on the information above John Doe’s DSCR will be 43%. See calculations below:-
- $1,500 + $450 + (3,000 * 0.05 = $150) + $50 / $5,000 = $2,150/ $5,000 which equates to 43%
In the above incidence Mr. John Doe # 2 will not qualify for the proposed Unsecured Loan he is requested.
There are a lot more factors that influence if you qualify for a loan but this is a key determining factor. Banks make their profits by interest revenue and therefore no further analysis will be done if it is determined that you cannot repay the proposed loan facility.
What other factors influence your ability to be approved for a loan? Well stay tune – Until next time my LinkedIn Family Take Care & God’s Blessings.
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