Dubai: If your loan applications keep getting rejected, despite having a good credit history, there may be common reasoning as to why.
Your debt-to-equity ratio, or simply called debt-to-equity ratio, is detrimental to lenders deciding whether or not to approve your loan application. And if your credit history is intact, but your loan applications are rejected, it’s most likely because your ratio is low. But what is it exactly?
Your debt-to-income ratio is the percentage of your monthly income that you need to spend on your monthly debt payments plus the projected payment on the new loan. This is to check whether your current debt increases or decreases your risk of taking out a new loan.
Generally, the lower your debt-to-equity ratio, the more likely you are to qualify for your loan, whether it’s a mortgage, car loan, or business loan. studies.
How does this ratio apply to me and how is it calculated?
The ratio of monthly loan payments (such as auto loans, personal loans, or other mortgages) or credit card commitments you may have to your monthly income determines your DBR – Debt ratio.
As such, the DBR provides a clear picture of your financial health. Some banks may call it your debt service ratio or your income to installment ratio.
Expressed in mathematical terms: DBR = Total Debt/Total Assets.
In this case, total debt is the sum of all your loan payments, any installment credit owing on your credit cards, plus 5% of the total credit limit of all cards in your name.
Is this the only reason why loans are refused?
“Still, the reason (for the rejection) may have nothing to do with you personally,” noted analysts at lender Citi. “Instead, it may have everything to do with you meeting a certain set of criteria.”
Each issuer maintains its own list of metrics against which all new credit applications are checked. These can include your income, credit score and debt ratio, but can also extend to where you work, they added.
“To complicate matters, these factors may become more stringent during an economic downturn (like right now), Citi analysts further explained.
“So while you may not know exactly why your application was denied, a quick look at some of these criteria against which applications for credit cards and personal loans are assessed can help you figure out how to improve your chances next time.”
Do all lenders calculate this the same way?
Although all lenders calculate your debt ratio using the same calculation, there are other factors that affect their approval process to get you a loan. Here, all lenders operate when they receive your loan application.
First, they add up the amount you pay each month for debt and recurring financial obligations (such as credit cards, auto loans and leases, and student loans).
However, note that this does not include your current home loan, mortgage, or rent, or other monthly expenses that are not debt (such as phone and electricity bills).
Second, add your projected mortgage payment to your total debt from step one. Then divide that total number by your monthly income. The resulting percentage is your debt-to-income ratio.
How high should my debt ratio be?
The Central Bank of the United Arab Emirates requires that a resident of the United Arab Emirates cannot have a ratio higher than 50%. This means that the combined monthly payments on your existing loans must not exceed 50% of your monthly income.
Financial planners reckon you’ll generally want to keep it around the 30% mark. Most lenders want your debt-to-equity ratio no higher than 36%, but some lenders or lending products may require a lower percentage to qualify.
Additionally, you can use freely available online calculators to add up all your monthly expenses including your mortgage/rent and any other loans, credit card payments as well as any other recurring expenses and it will calculate your debt ratio compared to your monthly income. !
How can I reduce my debt to income ratio?
If you find your ratio is too high, think about how you can reduce it. You may be able to pay off your credit cards or reduce other monthly debts.
Alternatively, increasing your down payment amount may lower your expected monthly mortgage payments. Or you might want to consider a cheaper house or car, or whatever it is you’re using the loan for.
You can lower your ratio by increasing your income, but some lenders may consider non-traditional sources of income such as allowances or trust income. If you have non-traditional sources of income, be sure to ask your lender if there are any products and programs that include them.
In addition to reducing your overall debt, it’s important to add as little, if any, new debt as possible during the buying process, as this will affect your credit history.
Maintaining a low debt-to-equity ratio can help you qualify for a loan and pave the way for other borrowing opportunities. It can also help you manage your finances responsibly.
How does my salary fit into all of this?
Although you may consider your salary a private matter, you will need to share it with your bank to establish a new financial relationship of any kind.
Every bank operating in the UAE requires applicants for credit cards or personal loans to have a minimum monthly salary.
Depending on the bank, this can be a minimum of 5,000 Dh to 10,000 Dh. If you earn less than minimum wage, you may need to go to another bank or consider other ways to meet your financial obligations.
Therefore, it is worth asking a bank representative about the minimum salary requirements before applying for a loan or card.
Does where I work also affect the outcome?
Your employer doesn’t just sponsor your UAE work permit, the company you work with can also determine if you qualify for a credit card or personal loan.
If you’ve ever been told that your employer is “not approved” or “unregistered,” it’s likely because the business isn’t registered with the bank. Each bank in the UAE has its own list of employers or companies against which all new account applications are checked.
Banks do this to check if your income or job is secure and your business is financially stable. Since the introduction of the Al Etihad credit bureau, these listings are now somewhat smaller, but as a general rule, large, well-known organizations are usually listed or registered.
If your employer is not on such a list, you can always ask the bank if they accept, as some banks accept applications even if the company is not listed.
Did you know that your age could also play a role in your loan approval process?
UAE banks operating in the country generally require you to be at least 21 years old when applying for the loan and under 65 when the loan comes due.
It’s because they want to make sure you get paid; someone outside this age range may not earn enough to pay off a loan or credit card.
If you are under 21 or over 65, then your best bet is to seek other sources of funding. Consider secured loans or supplemental credit cards instead.