John was going to take a car loan in the near future. But I heard on the radio that from the fall of 2020, people will not be able to get a loan if more than half of their salaries fall on monthly payments. John has a good unofficial income, but his salary is low. He fears that because of this he will not be able to buy a car. We are investigating whether it is true that John will not be able to get a loan, and what does the indicator of the debt burden have to do with it.
What is DBI?
The debt burden indicator (DBI) is the ratio of payments on all loans and borrowings of a person (including the one for which he has now come) to his monthly income.
All banks and microfinance organizations (MFIs) must calculate DBI when they issue new loans, as well as restructure or refinance old ones. When banks issue credit cards, extend their terms or increase their limits, they are also required to calculate an indicator of the client's debt burden.
There are cases when DBI is not calculated:
Why do banks and MFIs calculate DBI?
This will help them assess their risks. If the borrower has a high DBI, it is more likely that he will not be able to repay the debt. Therefore, the bank or MFI will have to “freeze” additional capital to cover possible losses. It is not profitable for organizations. Therefore, they can set higher interest rates on such loans or refuse to issue them altogether.
Many financial organizations used to calculate this indicator, but each according to its own formula. Now the personal income tax in all banks and MFOs will be calculated according to a single formula. The calculation principles are enshrined in the instructions for banks, microfinance and microcredit companies .
Why is it worth evaluating your DBI?
Spending more than half of your income on debt payments is risky. With a high personal income tax, there is a danger, with the slightest financial difficulties, not to cope with payments and fall into a debt trap.
In addition, with a high personal income tax, the chances of obtaining a loan are reduced. Any refusal is reflected in the credit history and can alert other banks and MFIs.
Before applying for a loan or loan, in any case, it is worthwhile to estimate the ratio of your income and the cost of paying off debts.
Is there a chance to get a loan if I have a high personal income tax?
There is. Banks and MFIs still have the right to lend to people with any DBI. The decision remains with the financial institution.
Lenders usually take into account not only the value of the personal income tax, but also other factors: for example, how much a person has left after all payments on debts. For one, this may be a living wage, and for another, an amount that will allow him to lead an ordinary life. Even if the personal income tax for these people is the same, in the second case, the bank or MFI is at less risk - and may well approve a loan or loan.
How to evaluate your DBI?
Banks and MFIs use a rather complex formula for calculations. But you can roughly calculate your DBI yourself. To do this, you need to divide the monthly expenses for all loans by the monthly income.
How to calculate loan expenses?
The amount of expenses can add up to several parts.
1. Monthly payments for all current loans and borrowings, even small ones - up to $ 300.
John has only one loan. Six months ago, he bought a TV. The store offered him an interest-free loan for a year. He decided to take advantage of this offer and now pays $ 50 a month on this loan.
2. Future payments on the loan that you are currently seeking. You can use a loan calculator to calculate payments.
To buy a car, John plans to get a loan for $ 50000 for 5 years. The monthly installment will be about $ 100.
3. Credit cards and overdraft cards also need to be considered. Banks and MFIs can use two card settlement options. They charge either 5% of your credit limit or 10% of your current card debt. If you have not made payment for the last month, the amount of overdue debt is added to this figure. It is not known which option your bank or MFI will choose. Therefore, count both numbers and choose the maximum.
John has a credit card with a limit of $ 1000. The current debt is $ 300. There are no delays.
In the first option, the following amount will be taken into account for calculating the personal income tax:
1000 × 5% = $ 50.
In the second:
250 × 10% = $ 25
For a rough estimate of the personal income tax, John should choose the larger of these two figures - $ 50.
4. If you acted as a co-borrower on someone else's loan, this also affects the personal income tax.
Banks and MFIs believe that each of the joint borrowers contributes a share of the loan payment in the same proportion as their incomes.
A couple of years ago, John's nephew just barely had enough official income to take out a loan. He asked John to become his co-borrower purely formally. In reality, John does not spend on this loan, his nephew makes payments in a disciplined manner - $ 100 a month.
John's official income is $ 300. The nephew's income is $ 500. That is, the ratio of their income is 2:3. The creditor believes that they share the payments in the same proportion: $ 50 are paid by John, and $ 50 - by his nephew.
For a correct calculation, your lender must have information about the income of the person on whose loan you are co-borrower. If you do not provide supporting documents, then the bank or MFI may decide that all the costs of this loan are borne only by you. And this will increase your DBI.
This is exactly what happened to John when he came for a car loan. He could not confirm the income of his nephew, so the bank considered that John was single-handedly repaying a relative's loan.
If you yourself took out a loan with a co-borrower, then banks and MFOs will also imply that one part of the payment is made by you, and the other - by the co-borrower. For the correct calculation, you will also need to confirm his income, otherwise all expenses on this loan will be recorded on you.
In the event that you want to take a new loan together with the co-borrower, the personal income tax will be considered in a slightly different way. The lender will calculate the total average monthly expenses - yours and the co-borrower's - and divide them by your total average monthly income. This will be the personal income tax for the issuance of this loan.
5. If you are a guarantor for someone else's loan, this does not affect your personal income tax, as long as the main borrower regularly makes payments. But if he stops paying and his debt goes to you, payments on his loan should also be included in the calculation of your personal income tax.
John has no such obligations.
Now all payments must be added up.
Here is the amount of expenses John got:
50 (for a TV) + 100 (for a future car) + 50 (by credit card) + 100 (by a nephew's loan) = $ 300.
No other expenses of the borrower, except for payments on loans and borrowings, are not taken into account when calculating the personal income tax.
How to calculate the average monthly income?
Add up all the income from the last 12 months, which you can confirm with official documents. Count all metrics after taxes. When doing this, consider not only your monthly salary, but also bonuses, overtime pay, benefits, and other income that you can prove. If you take out a loan with a co-borrower, his official income is summed up with yours.
The resulting amount must be divided by 12. This will be your average monthly income, which the bank or MFI will take into account in their calculations.
If you recently (less than a year, but more than three months ago) changed your job, the bank has the right to estimate your average monthly income exactly for the time that you are in the new job. He can also adjust the calculation if your salary at your previous job increased more than three months ago.
Pensioners can take their pension for any month during the year to calculate the personal income tax. If its size has changed during this time, select the month when the amount was the largest.
To prove your income, the easiest way is to bring certificates to the bank or MFO. But other documents will do as well. For example, it can be a work contract (GPC), an agreement indicating the rent that you receive for renting an apartment, or a bank statement, which will reflect the regular receipt of money.
Individual entrepreneurs can present, for example, a book of income and expenses, tax returns, copies of receipts for payment of taxes for the required periods.
An approximate list of documents with which the borrower can confirm his income can be found in the instructions for banks, microfinance and microcredit companies. But the creditor himself decides which of them he agrees to accept for calculating the personal income tax.
According to the certificate, John's official salary is 300 (although, taking into account unofficial earnings, he gets $ 1000 a month). He has no additional regular income, which he could prove with documents.
Thus, its DBI can be roughly estimated as follows:
300 (all loan expenses) / 400 (official income) × 100 = 82.5%.
By the standards of banks and MFOs, this is a high DBI. With such an indicator, it will be more difficult for John to get a loan or a loan than for people with a personal income tax of less than 50%.
If John's entire income was official, then his personal income tax would be 33% and it would not be difficult to get a loan.
But banks and MFIs can assess the solvency of a borrower not only on the basis of officially confirmed income.
And if you have income, but no certificates?
If the borrower cannot prove his financial solvency with documents, lenders have the right to use alternative methods of calculating income.
Method 1. Based on the application of the borrower
The borrower can indicate his income in the questionnaire, which he fills out when contacting a bank or MFI. That's what it's called - declared income. The lender will compare this figure with the average per capita income in the region where the borrower is registered. For calculations, he will take the figure that turns out to be less. The average per capita income by region can be found on the website (section "Living standards").
John lives in some city. He wrote in the questionnaire that his income is $ 1000 a month (this is how much he receives, taking into account unofficial part-time jobs). According to statistics, the average per capita income in the II quarter of 2019 is $ 500. It is his bank or MFO that will be taken into account when calculating the personal income tax. If John indicated that he receives $ 300 a month, the creditor would use this amount.
If you calculate John's DBI in this way, you get:
(300 (credit costs) / 500 (average per capita income in the region)) × 100 = 53.9%.
This is also a fairly high DBI. But if John has not delayed payments before, then the loan will most likely be approved for him.
Method 2. Based on your own models
Financial institutions can develop their own models to assess the solvency of borrowers. They can use many parameters to calculate the client's estimated income.
For example, a bank or MFI can estimate how much people of the same profession, age and experience in the same region as a potential borrower usually earn. Then the lender will compare this data with the income that the borrower indicated in the questionnaire and decide whether the numbers in the questionnaire need to be adjusted.
In some cases, such calculation models take into account the financial discipline of the borrower. Banks look to see if a person has had delinquencies on loans and borrowings. Sometimes they even check whether he transfers taxes and pays for utility bills on time.
You can only roughly estimate your personal income tax according to the model of a bank or MFO. But you will never know which formula the lender will use - after all, this is his trade secret.
John has been working as a plumber for 20 years. This is indicated in his work book. The bank has information that plumbers in Kaluga usually earn from $ 300 to $ 1000. According to the bank, John's experience allows him to receive at least $ 700. It is this amount that the bank can take into account as its average monthly income.
Based on the bank's model, John's DBI is:
300 (loan expenses) / 1000 (John's salary according to the bank's assessment) × 100 = 41.3%.
This is a good DBI. With such an indicator, John will almost certainly get a loan.
Banks and MFOs can use this method and only when issuing consumer loans in the amount of up to $ 1000 and car loans.
Method 3. Based on loan costs
This approach can be applied to those clients who have a good and long credit history. The bank or MFI will make inquiries with the credit bureaus and find out how much, on average, a person is already paying or was paying until recently for all his loans and borrowings.
To calculate, MFOs use payments for the last year, banks - for the last two years. If for several months (no more than six months) a person does not have loans and borrowings, banks may not include this period in the calculation and divide payments into a smaller number of months.
On the basis of the average monthly amount of credit expenses, the so-called imputed income is considered. It can also be used to calculate the DBI. To roughly estimate the imputed income, multiply your loan payments by two.
Two years ago, John already took out a loan for $ 3000 to make major repairs in the apartment. He paid off this loan in a year and a half. For the last six months he has been paying a loan for a TV and has already paid off half of the debt - $ 250. He also started using his credit card six months ago. John always fit into the grace period and did not accrue interest on the credit card. In total, during this time, he spent and repaid $ 100 on the card.
In this case, John's obligations as a co-borrower are not taken into account, because in reality he does not make payments.
John's total imputed income is:
((3000 (for repairs) + 300 (for a TV) + 100 (by credit card)) / 24 months) x 2 = $ 350.
With this calculation, the DBI will be (16,500 / 18,333) × 100 = 90%.
When calculating according to this model, John got the highest DBI. If a bank or an MFI uses this particular method of assessing income, then it will be extremely difficult for John to lend money.
As you can see from the examples with John, the DBI can vary greatly depending on the method of calculation.
Can you find out which method the selected lender is using?
If the borrower can confirm his income, then the lender will focus on him. Therefore, it is better to bring all the necessary documents to the bank.
In cases where it is not possible to confirm the income, the lender will use other methods of calculating the personal income tax. And it is impossible to find out in advance which method he will choose specifically in your case. Banks and MFIs can use any of the above methods at their discretion.
Evaluate the DBI in all ways and focus on the worst value. This will save yourself from unpleasant surprises.
What if the DBI is too high?
Try to balance your income and expenses on loans and borrowings: if possible, pay off your debts, close unnecessary credit cards or reduce the limit on them. Collect all possible documents that can prove your income.
John assessed his chances and tried to improve the situation. He paid off the balance of the TV loan ahead of schedule, paid off the credit card debt and reduced the limit on it to $ 300. He also decided to wait a couple of months until his nephew finally paid off his loan. In addition, John has registered as a self-employed. So he will be able to confirm all his income with documents. As a result, his personal income tax will become much less and the chances of getting a loan on favorable terms will increase.
If the DBI is still high, consider hiring a co-borrower with a high official income. At the same time, it is important that the co-borrower himself does not have too many loans. You can also attract a guarantor: this will not affect the calculation of the personal income tax, but it can increase the chances of getting a loan.
And most importantly, carefully assess whether your real budget will be able to handle the new loan. If a financial institution refuses to issue money, this is a shame. But if you take out a loan and, as a result, cannot pay on it, this is already dangerous.
What is DBI?
The debt burden indicator (DBI) is the ratio of payments on all loans and borrowings of a person (including the one for which he has now come) to his monthly income.
All banks and microfinance organizations (MFIs) must calculate DBI when they issue new loans, as well as restructure or refinance old ones. When banks issue credit cards, extend their terms or increase their limits, they are also required to calculate an indicator of the client's debt burden.
There are cases when DBI is not calculated:
- when applying for loans up to $ 300;
- when issuing preferential educational loans and military mortgages with state support;
- when registering a mortgage vacation;
- when restructuring a loan, if the borrower's payments decrease.
Why do banks and MFIs calculate DBI?
This will help them assess their risks. If the borrower has a high DBI, it is more likely that he will not be able to repay the debt. Therefore, the bank or MFI will have to “freeze” additional capital to cover possible losses. It is not profitable for organizations. Therefore, they can set higher interest rates on such loans or refuse to issue them altogether.
Many financial organizations used to calculate this indicator, but each according to its own formula. Now the personal income tax in all banks and MFOs will be calculated according to a single formula. The calculation principles are enshrined in the instructions for banks, microfinance and microcredit companies .
Why is it worth evaluating your DBI?
Spending more than half of your income on debt payments is risky. With a high personal income tax, there is a danger, with the slightest financial difficulties, not to cope with payments and fall into a debt trap.
In addition, with a high personal income tax, the chances of obtaining a loan are reduced. Any refusal is reflected in the credit history and can alert other banks and MFIs.
Before applying for a loan or loan, in any case, it is worthwhile to estimate the ratio of your income and the cost of paying off debts.
Is there a chance to get a loan if I have a high personal income tax?
There is. Banks and MFIs still have the right to lend to people with any DBI. The decision remains with the financial institution.
Lenders usually take into account not only the value of the personal income tax, but also other factors: for example, how much a person has left after all payments on debts. For one, this may be a living wage, and for another, an amount that will allow him to lead an ordinary life. Even if the personal income tax for these people is the same, in the second case, the bank or MFI is at less risk - and may well approve a loan or loan.
How to evaluate your DBI?
Banks and MFIs use a rather complex formula for calculations. But you can roughly calculate your DBI yourself. To do this, you need to divide the monthly expenses for all loans by the monthly income.
How to calculate loan expenses?
The amount of expenses can add up to several parts.
1. Monthly payments for all current loans and borrowings, even small ones - up to $ 300.
John has only one loan. Six months ago, he bought a TV. The store offered him an interest-free loan for a year. He decided to take advantage of this offer and now pays $ 50 a month on this loan.
2. Future payments on the loan that you are currently seeking. You can use a loan calculator to calculate payments.
To buy a car, John plans to get a loan for $ 50000 for 5 years. The monthly installment will be about $ 100.
3. Credit cards and overdraft cards also need to be considered. Banks and MFIs can use two card settlement options. They charge either 5% of your credit limit or 10% of your current card debt. If you have not made payment for the last month, the amount of overdue debt is added to this figure. It is not known which option your bank or MFI will choose. Therefore, count both numbers and choose the maximum.
John has a credit card with a limit of $ 1000. The current debt is $ 300. There are no delays.
In the first option, the following amount will be taken into account for calculating the personal income tax:
1000 × 5% = $ 50.
In the second:
250 × 10% = $ 25
For a rough estimate of the personal income tax, John should choose the larger of these two figures - $ 50.
4. If you acted as a co-borrower on someone else's loan, this also affects the personal income tax.
Banks and MFIs believe that each of the joint borrowers contributes a share of the loan payment in the same proportion as their incomes.
A couple of years ago, John's nephew just barely had enough official income to take out a loan. He asked John to become his co-borrower purely formally. In reality, John does not spend on this loan, his nephew makes payments in a disciplined manner - $ 100 a month.
John's official income is $ 300. The nephew's income is $ 500. That is, the ratio of their income is 2:3. The creditor believes that they share the payments in the same proportion: $ 50 are paid by John, and $ 50 - by his nephew.
For a correct calculation, your lender must have information about the income of the person on whose loan you are co-borrower. If you do not provide supporting documents, then the bank or MFI may decide that all the costs of this loan are borne only by you. And this will increase your DBI.
This is exactly what happened to John when he came for a car loan. He could not confirm the income of his nephew, so the bank considered that John was single-handedly repaying a relative's loan.
If you yourself took out a loan with a co-borrower, then banks and MFOs will also imply that one part of the payment is made by you, and the other - by the co-borrower. For the correct calculation, you will also need to confirm his income, otherwise all expenses on this loan will be recorded on you.
In the event that you want to take a new loan together with the co-borrower, the personal income tax will be considered in a slightly different way. The lender will calculate the total average monthly expenses - yours and the co-borrower's - and divide them by your total average monthly income. This will be the personal income tax for the issuance of this loan.
5. If you are a guarantor for someone else's loan, this does not affect your personal income tax, as long as the main borrower regularly makes payments. But if he stops paying and his debt goes to you, payments on his loan should also be included in the calculation of your personal income tax.
John has no such obligations.
Now all payments must be added up.
Here is the amount of expenses John got:
50 (for a TV) + 100 (for a future car) + 50 (by credit card) + 100 (by a nephew's loan) = $ 300.
No other expenses of the borrower, except for payments on loans and borrowings, are not taken into account when calculating the personal income tax.
How to calculate the average monthly income?
Add up all the income from the last 12 months, which you can confirm with official documents. Count all metrics after taxes. When doing this, consider not only your monthly salary, but also bonuses, overtime pay, benefits, and other income that you can prove. If you take out a loan with a co-borrower, his official income is summed up with yours.
The resulting amount must be divided by 12. This will be your average monthly income, which the bank or MFI will take into account in their calculations.
If you recently (less than a year, but more than three months ago) changed your job, the bank has the right to estimate your average monthly income exactly for the time that you are in the new job. He can also adjust the calculation if your salary at your previous job increased more than three months ago.
Pensioners can take their pension for any month during the year to calculate the personal income tax. If its size has changed during this time, select the month when the amount was the largest.
To prove your income, the easiest way is to bring certificates to the bank or MFO. But other documents will do as well. For example, it can be a work contract (GPC), an agreement indicating the rent that you receive for renting an apartment, or a bank statement, which will reflect the regular receipt of money.
Individual entrepreneurs can present, for example, a book of income and expenses, tax returns, copies of receipts for payment of taxes for the required periods.
An approximate list of documents with which the borrower can confirm his income can be found in the instructions for banks, microfinance and microcredit companies. But the creditor himself decides which of them he agrees to accept for calculating the personal income tax.
According to the certificate, John's official salary is 300 (although, taking into account unofficial earnings, he gets $ 1000 a month). He has no additional regular income, which he could prove with documents.
Thus, its DBI can be roughly estimated as follows:
300 (all loan expenses) / 400 (official income) × 100 = 82.5%.
By the standards of banks and MFOs, this is a high DBI. With such an indicator, it will be more difficult for John to get a loan or a loan than for people with a personal income tax of less than 50%.
If John's entire income was official, then his personal income tax would be 33% and it would not be difficult to get a loan.
But banks and MFIs can assess the solvency of a borrower not only on the basis of officially confirmed income.
And if you have income, but no certificates?
If the borrower cannot prove his financial solvency with documents, lenders have the right to use alternative methods of calculating income.
Method 1. Based on the application of the borrower
The borrower can indicate his income in the questionnaire, which he fills out when contacting a bank or MFI. That's what it's called - declared income. The lender will compare this figure with the average per capita income in the region where the borrower is registered. For calculations, he will take the figure that turns out to be less. The average per capita income by region can be found on the website (section "Living standards").
John lives in some city. He wrote in the questionnaire that his income is $ 1000 a month (this is how much he receives, taking into account unofficial part-time jobs). According to statistics, the average per capita income in the II quarter of 2019 is $ 500. It is his bank or MFO that will be taken into account when calculating the personal income tax. If John indicated that he receives $ 300 a month, the creditor would use this amount.
If you calculate John's DBI in this way, you get:
(300 (credit costs) / 500 (average per capita income in the region)) × 100 = 53.9%.
This is also a fairly high DBI. But if John has not delayed payments before, then the loan will most likely be approved for him.
Method 2. Based on your own models
Financial institutions can develop their own models to assess the solvency of borrowers. They can use many parameters to calculate the client's estimated income.
For example, a bank or MFI can estimate how much people of the same profession, age and experience in the same region as a potential borrower usually earn. Then the lender will compare this data with the income that the borrower indicated in the questionnaire and decide whether the numbers in the questionnaire need to be adjusted.
In some cases, such calculation models take into account the financial discipline of the borrower. Banks look to see if a person has had delinquencies on loans and borrowings. Sometimes they even check whether he transfers taxes and pays for utility bills on time.
You can only roughly estimate your personal income tax according to the model of a bank or MFO. But you will never know which formula the lender will use - after all, this is his trade secret.
John has been working as a plumber for 20 years. This is indicated in his work book. The bank has information that plumbers in Kaluga usually earn from $ 300 to $ 1000. According to the bank, John's experience allows him to receive at least $ 700. It is this amount that the bank can take into account as its average monthly income.
Based on the bank's model, John's DBI is:
300 (loan expenses) / 1000 (John's salary according to the bank's assessment) × 100 = 41.3%.
This is a good DBI. With such an indicator, John will almost certainly get a loan.
Banks and MFOs can use this method and only when issuing consumer loans in the amount of up to $ 1000 and car loans.
Method 3. Based on loan costs
This approach can be applied to those clients who have a good and long credit history. The bank or MFI will make inquiries with the credit bureaus and find out how much, on average, a person is already paying or was paying until recently for all his loans and borrowings.
To calculate, MFOs use payments for the last year, banks - for the last two years. If for several months (no more than six months) a person does not have loans and borrowings, banks may not include this period in the calculation and divide payments into a smaller number of months.
On the basis of the average monthly amount of credit expenses, the so-called imputed income is considered. It can also be used to calculate the DBI. To roughly estimate the imputed income, multiply your loan payments by two.
Two years ago, John already took out a loan for $ 3000 to make major repairs in the apartment. He paid off this loan in a year and a half. For the last six months he has been paying a loan for a TV and has already paid off half of the debt - $ 250. He also started using his credit card six months ago. John always fit into the grace period and did not accrue interest on the credit card. In total, during this time, he spent and repaid $ 100 on the card.
In this case, John's obligations as a co-borrower are not taken into account, because in reality he does not make payments.
John's total imputed income is:
((3000 (for repairs) + 300 (for a TV) + 100 (by credit card)) / 24 months) x 2 = $ 350.
With this calculation, the DBI will be (16,500 / 18,333) × 100 = 90%.
When calculating according to this model, John got the highest DBI. If a bank or an MFI uses this particular method of assessing income, then it will be extremely difficult for John to lend money.
As you can see from the examples with John, the DBI can vary greatly depending on the method of calculation.
Can you find out which method the selected lender is using?
If the borrower can confirm his income, then the lender will focus on him. Therefore, it is better to bring all the necessary documents to the bank.
In cases where it is not possible to confirm the income, the lender will use other methods of calculating the personal income tax. And it is impossible to find out in advance which method he will choose specifically in your case. Banks and MFIs can use any of the above methods at their discretion.
Evaluate the DBI in all ways and focus on the worst value. This will save yourself from unpleasant surprises.
What if the DBI is too high?
Try to balance your income and expenses on loans and borrowings: if possible, pay off your debts, close unnecessary credit cards or reduce the limit on them. Collect all possible documents that can prove your income.
John assessed his chances and tried to improve the situation. He paid off the balance of the TV loan ahead of schedule, paid off the credit card debt and reduced the limit on it to $ 300. He also decided to wait a couple of months until his nephew finally paid off his loan. In addition, John has registered as a self-employed. So he will be able to confirm all his income with documents. As a result, his personal income tax will become much less and the chances of getting a loan on favorable terms will increase.
If the DBI is still high, consider hiring a co-borrower with a high official income. At the same time, it is important that the co-borrower himself does not have too many loans. You can also attract a guarantor: this will not affect the calculation of the personal income tax, but it can increase the chances of getting a loan.
And most importantly, carefully assess whether your real budget will be able to handle the new loan. If a financial institution refuses to issue money, this is a shame. But if you take out a loan and, as a result, cannot pay on it, this is already dangerous.
