What is Debt Burden Ratio (DBR) ?
A commonly used term/formula in Banking during loan assessments, A Debt burden ratio is the ratio of total monthly installment/commitments of credit card, loans, or any other committed monthly repayments to the total income of an individual.
Often when we apply for a Credit Card, or any sought of loans we have been told that our case has been rejected due to High Debt Burden ratio.
How Debt Burden Ratio is Calculated ?
DBR is simply calculated by accumulating the number of loans availed by a customer whose installments are deducted on monthly basis against the income generated by the concerned customer as per his profile e.g Salaried/Businessperson.
A general consensus is that a customer can spare his 50 % Income to pay the loan and 50 % to pay his other monthly expenses. Now if the Debt Burden exceeds the 50 % benchmark it is considered a High DBR meaning he cannot bear the expense of loan installments which means his re-payment capacity is not enough to afford any further loans.
The DBR is basically used as a tool to analyze the repayment capacity of an Individual/Company to see if they can further bear the burden of loans or not.
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What should a Customer do to reduce the DBR ?
If a Customer wants an important loan and his application is being rejected due to a High DBR mainly because of moderate-income and the customer is already availing unnecessary loans or credit cards then he should pay off all his previous loans or surrender unnecessary credit cards which are resulting in high debt burden ratio.
Also if a customer has any additional source of income then he may disclose it to the concerned Bank or loan disbursing company to strengthen the income which may ultimately reduce the High DBR and get himself qualified for further loan processing.