How Much Debt is Okay?

9 February 2018

Will you need a loan for your car, home or another major financial goal whether now or in the future? Would you prefer to pay a smaller amount on your current loans so that you can save more money? Your debt service ratio (DSR) is crucial to both scenarios. So today we will explore your DSR and steps you can take to ensure it does not go beyond 45%; as most traditional financial institutions in Jamaica prefer to lend to individuals who have a DSR below 45%.

Why is Your Debt Service Ratio (DSR) Important?

Your DSR is one of the ways that financial institutions, measure your ability to repay debts, while meeting your other financial obligations. This therefore indicates to you and your financial institution the percentage of your gross income consumed by debt.

How to Calculate Your Debt Service Ratio (DSR)?

Loans	Monthly Repayment (J$)
Hire Purchase + Car Loan +Mortgage/Rent + Unsecured Loans + Others
Credit Card Payments
Minimum payment on credit card limit. (Typically 5% of your credit card limit). E.g. If the credit limit is J$100,000, the minimum payment would be 5% or J$5,000
TOTAL

Formula for Calculating Your DSR

My DSR

Monthly loan repayments including mortgage/rent x 100

Gross Income

Interpreting Your DSR Score

Less than 45%: Congratulations less than 45% of your income is being used to repay loans! You are therefore in a great position to finance your goals using a loan. JMMB offers several flexible loan solutions that can help you, whether it is getting your new car, financing your education or renovating your home.

More than 45%: Your debt service ratio is high in relation to your income so you may experience challenges in:

saving towards your financial goals and establishing your emergency savings.
meeting your monthly and or annual financial obligations; and
qualifying for financing of your goals through traditional financial institutions. This may tempt you to seek the assistance of same-day-loan facilities; however these institutions charge exorbitant interest rates of approximately 50% or more per annum, when compared to interest rates of 25% or less for similar loans at traditional financial institutions.

How to Lower Your DSR?

If your DSR is above 45% you can try to lower it by:

increasing your income and/or decreasing your expenses;
reducing the number of credit cards and/or the credit card limit, since your DSR will factor that you may need to use your maximum credit card limit, and may opt to pay the minimum balance, which is approximately 5% of the credit card balance;
consolidating your debts to lower your monthly payments with a JMMB Debt Consolidation Loan. Consolidating your loan will allow you to save while reducing your DSR; so if you can save J$10,000 per month, you would have saved at least J$600,000 more in 5 years.

How much do you want to save on loan repayments, which can then be used to invest in your future? If debt consolidation would be in your best interest, JMMB can use your cash, investments, motor vehicle, real estate or salary as the collateral to secure a loan. Please give us a call on 998-5662 to start right now.

Written by: Michelle Sinclair-Doyley, Manager, Client Financial Education, JMMB Group