What Is Debt Service Ratio?

Here's what it means and how you can use it in your debt evaluation.

It is a comparison of your debt commitment to your income. In other words, how much of your income will be used to repay your loans.

Let’s use an example. Ahmad earns RM4,500 a month. He has a car loan that requires him to pay RM800 each month and a home loan that requires him to pay RM1,600 each month in mortgages. Using the formula above, Ahmad’s DSR is 53%.

Banks generally, will accept a DSR below 60% for all debt commitments you have. This means that if Ahmad wants to apply for a personal loan in the future, he cannot have additional monthly commitments beyond RM300, unless his earnings per month increases.

How do I improve my DSR?

💡 Pro Tip: The DSR is calculated using your net income. This is the amount you get after statutory deductions for EPF, SOCSO and taxes (PCB) have been made. Also important to note is that the monthly commitment calculation includes both bank debts and non-bank debts. These include PTPTN loans, payment instalments from non-bank institutions like AEON Credit, FlexiPlans by COURTS, and others.

It is advisable to maintain your DSR between 30 to 40% range at all times. This indicates that you have more disposable income than debt obligations on a monthly basis.

If you are looking to improve your DSR, there are several things you can do:

1. Start paying off your debts and don’t maximise your credit card spend

This is going to sound like a no-brainer but difficult to maintain for certain people be it due to a matter of their current circumstances or a lack of willpower in controlling their impulse to shop till they drop.

If you have a credit card, make sure you pay your entire balance at the end of every month so you don’t have the debt snowballing which will increase your DSR beyond the healthy range. It is easier to just pay off the minimum amount on your credit card or installment plans. But if possible, you should try to pay off as much of the existing debts in the months where you are able to earn more. This also helps you get closer to reducing your debts and eventually achieve debt-free status.

2. Collect and maintain proof of consistency in income and non-bank credit repayments

Being a freelancer or self-employed, one of the major challenges to get access to financing from banks is the ability to prove consistent earnings. Most traditional banks still rely on income statements to make decisions to lend to potential borrowers. It will be helpful if you can prove steady earnings using bank statements or payment invoices to indicate that you have income on a monthly basis.

Any proof of debt repayments from other financial institutions, including co-operatives (koperasi), can also be good for banks to identify steady repayments over time on your debts in the event you don’t have existing credit with any bank.

3. Save more when you can

You can also use proof of savings as one of the supporting documents to help strengthen your loan application in the event your DSR is high.  

One of the benefits you have as a freelancer or self-employed individual is the possibility that your monthly earnings are higher in some months due to a spike in demand for your service compared to employees with a fixed salary. So when you earn more, place some money into savings products such as fixed deposits or investments into Amanah Saham Berhad (ASB) to show your positive money management behaviour.

4. When in doubt, check your credit score

If you are not sure about your current financial standing and want to know more about your financial health, get a free check through Credit Score or other credit rating platforms such as CTOS and My Credit Info. 

By understanding your credit score, it gives you time to fix your credit repayment performance over a couple of months before you submit a loan application to the banks which might improve your chance of success.

Now you can review your DSR before applying for financing from banks to increase your chance of getting your loan application approved. But don’t worry if you get rejected by one bank – don’t give up! Each bank may have their own DSR threshold so try applying to a few more banks to get the financing you require.

📍 Reminder: Eligibility vs Affordability

Do keep in mind that even in the event you get your loan approved despite a high DSR, it is best for you to evaluate if you can afford this new loan on top of your existing debt obligations. There is a difference between eligibility and affordability. Maybe you are eligible for this new loan you are applying for but you may not be able to afford it given your current income and commitments. and

Where affordability is concerned, it wouldn’t hurt to look ahead too. For example, you may be looking forward to a new addition to your family. This is great news!

But you would also need to be mindful about the expenses you would need to pay for. As commitments for loans can take anywhere from a few months to many years, you would need to make an assessment whether it would make sense to take up a loan even if the bank says you are eligible right now.