What is Debt Service Ratio?
This ratio shows the portion of your income which goes towards servicing your debts, right from your home loan EMIs, to your credit card debt, to that small loan you’ve taken from a friend. In short, this ratio tells you how deep you are stuck in a debt hole.
To get an estimate of this ratio you need know the total debt you owe. Which is, all EMIs, for all loans. Then you need to know your total monthly income.
Let’s say your house EMI is Rs. 25000/-, your car EMI is Rs. 5000/-, your personal loan EMI is Rs. 2000/- and your credit card bill is Rs. 3000/-.
Thus, the aggregated value of your total EMI per month is Rs. 35,000/-.
Let’s say your salary is Rs. 1,00,000/- per month. In this example your debt service ratio = Total EMI/Monthly Salary= (35000/100000)% = 35%
So how much should the debt service ratio be?
A 30% to 35%debt service ratio is considered normal.
In case the income of an individual is low this ratio may go up to 40% to 45%.
Anything above 45% is not advisable as that can bring you to the edge of a debt trap.
Now that you know how to find out the debt-service ratio, find out what’s yours and take the necessary action.
2 comments
Nimish Rambhia
September 25, 2021 at 8:52 am
Thank you. Quite Informative.
Venkat Balan
September 25, 2021 at 9:04 am
Very useful simple tip. Thanks so much