• What is Debt to Burden Ratio & its importance in the UAE?

    In order to protect the future of the UAE’s economy, the UAE Central Bank introduced a measure to implement restriction on consumer’s lending ability depending on their debt to burden ratio.

    Every bank in the UAE has its own criteria that the applicant must meet to gain a loan approval. Most of the factors are determined at the sole discretion of the bank. There is an industry standard requirement in place which is set as the limit of the applicant’s debt to burden ratio. Read on to understand how the debt to burden ratio affects your loan applications reduces risk.

    Debt to burden ratio

    Debt to burden ratio (DBR) is the maximum funds that you can finance based on the percentage of your regular income. The UAE Central Bank has limited the debt payment to not exceed more than 50% of your monthly income. If your monthly income is AED20,000, your debt repayments cannot exceed AED10,000. The debt to burden ratio includes your existing debt repayments which you currently hold.

    Importance of debt to burden ratio

    UAE’s economy is affected by falling oil prices and government law in corporate tax, which has a direct effect on the banks to tighten their lending criteria.

    When you apply for a loan, the first thing the banks do is check your debt to burden ratio and based on it they decide how much you can borrow from them and how much you are actually eligible to borrow. The bank is responsible for not providing finance if the customer's debt repayment exceeds 50% of their monthly income.

    The customer will be required to declare all the debt details and disclose the credit cards they own. The credit cards are also taken into consideration but they only contribute 5% towards the debt to burden ratio based on the credit card limit.

    The rate and the amount is affected by the debt to burden ratio. If your current debt repayment is 40% of your monthly income, you can only get further 10% based off your monthly income. If your current debt repayment is 5%, you are eligible to get finance up to 45% depending on your monthly income.

    Debt to burden ratio is a major factor that is taken into consideration when you are applying for a home loan, personal loan, Islamic financing, and car loan.

    How to determine your debt to burden ratio?

    It is easy to work out your debt to burden ratio. Make a note of the mandatory outgoings taken as financial debt, combine all your credit card limits plus 5%, divide that by your monthly income, you will get your debt to burden ratio. The financial debt includes car loan, personal loan, home loan, etc.

    Your debt to burden ratio will also be included in your credit report. You can get your credit report from the Al Etihad Credit Bureau. Banks check the credit reports of all applicants and then take a call on whether the loan application has to be approved or not. The credit reports help individuals understand their debt and take measures to fix their score.

    Reduce your debt to burden ratio

    Once you have understood the debt to burden ratio, you can start reducing it. You can make regular and over payments on existing debt when you have additional income. If you are trying to consolidate your debt, you can opt for the 0% balance transfer products. You can also decrease the debt to burden ratio by increasing your salary. If you are looking for a change in employment, you can negotiate for a better hike in your pay and this will help decrease your debt to burden ratio.

    When you are repaying the debt, you must understand that the debt to burden ratio will increase as a higher chunk of your income will go in paying the debt. If your monthly income is AED20,000, and you are spending AED6,000 towards debt repayment each month, your debt to burden ratio is 30%. If you wish to clear the debt sooner and you are spending AED10,000 each month to pay down your debt, your ratio will rise to 50%. The cost is higher initially but after you have paid off all the debt, your debt to burden ratio will come down to 0% as you will no longer be servicing any debt.

    When you are taking any loan or credit card, ensure you are able to repay them in a stipulated time. You must compare the interest rates and choose the one that will be less costly for you in the long run. When your debt to burden ratio is low, you will easily get credit and you will also be in a position to bargain for the interest rates and other terms and conditions. Maintain a good credit score and a low debt to burden ratio so that you are in a better position to get quick approvals for your loan application.

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