Did you know Debt Service Ratio (DSR) is the No. 1 reason CEOs and professionals get into severe debt problems? Do high-income earners get into debt problems? This is a common misconception or question I’ve gotten when I hosted a webinar two weeks ago.
Hi, my name is Ka Hoe and I’m the founder of J Advisory. So the story goes like this. There was a doctor who went to see AKPK’s officer. For those of you who don’t know what AKPK is, it’s a division under Bank Negara which helps you if you need to overcome your severe debt problems. They offer free credit counselling advice to you.
So this doctor who earns a very good income of RM 50,000 a month needed help on managing his debt. With that kind of income, the AKPK officer was surprised about what kind of debt could he possibly have. The AKPK officer did not expect the doctor to have any problem.
“I can’t repay my credit card debts, personal loan and housing loan of RM 80,000 a month“, the doctor said. The officer almost fainted. He mustered enough courage to ask “How (in the world) did you get yourself into paying RM 80,000 a month in loans?”
“Ohh, I bought 2 properties side by side because my friends told me I would make money if I invested in properties. I bought one to stay in and the house next door as an investment”, the doctor said. “And I love cars since I was a boy, so I bought a Mercedes and BMW at the same time. All of my friends also have two cars”. The officer’s jaw drop.
How many of you have the same thought, that when you earn a high income, it is almost impossible to have such a severe debt problem of negative RM 30,000 a month? Don’t you find it weird, that you thought only low-income earners had money problems? High-income earners shouldn’t have any money problems, right? Wrong!
Let me explain. Why do high-income earners have a high debt problem? This is a common thing that I’ve seen in my past 12 years of experience helping people plan their financials. I have helped many high-income earners turn around from depression to have healthy savings. One of the biggest problems is due to the concept called Debt Service Ratio (DSR).
This is a calculation bank uses to measure how well you can repay your loans. For example, if you have a Debt Service Ratio of 80%, basically it means that the bank will allow you to take up to eight thousand per month instalment when you earn RM 10,000/month. As crazy as it seems, it is true. Refer to this picture below.
This is one of the sample guidelines by two banks in Malaysia. As you can see the higher your income, the higher the percentage allowed for loan repayments. The lower your income, the bank assumes you have a significant amount spent on necessities and needs. Hence you would have a lower disposable income, with lower savings.
Compare this to someone with higher income (e.g. above RM 10,000/month), they would spend more on necessities but the proportion would not be the same as a low-income earner. Hence, a higher disposable income and higher savings should be able to pay more loans. This is the reference point made by all the banks when developing their guideline.
Of course, the banks have different grading and different calculations for different types of employment. For example, it is very different for somebody who is an employee or CEO working for a multinational company compared to someone working in his own business from a small and medium enterprise.
So once you understand this, then you will understand why high-income earners are able to borrow more money. Let’s understand how to calculate Debt Service Ratio (DSR).
It is very simple to calculate your Debt Service Ratio (DSR). Referring to the picture above, first, you need to total up your ‘Total Debt Repayments per month”. If you need a tool, we normally use this Debt Management Template in our classes. You can download it HERE. Next, you need to get your “Net Income”. Net Income is defined as
‘Your Gross Salary’ minus off ‘Your EPF, Socso, EIS & PCB’
Then divide both numbers and multiply by 100. The higher the percentage, the higher the commitment you have.
You want to use your own numbers. You can refer HERE on how to get your credit report for FREE without leaving the comfort of your home.
DSR is similar to a double-edged sword. If you don’t know how to use it, it can harm you but if you know how to use it, you can use it to your advantage. For example, I helped James save RM 10,000 a month despite him having a deficit of RM 18,000 a month. Read to understand his background first and see if you could guess how we used DSR to get more loans despite James having a deficit.
So let’s understand James’s DSR first. Refer to the picture above.
Why do most people miss this option on solving their debt problem which James used? It is because most people think their DSR already ‘koyak’ (does not qualify). Refer to this picture below.
But in actual fact, this is an assumption. The key point on how to use DSR is to get James a lower interest loan even though James is in deficit, banks are only able to calculate his DSR if it appears on James’s credit report (CCRIS).
So when you look into his DSR calculation above, there were 2 loans that were not in his credit report (CCRIS), namely the ‘Company Loan‘ & ‘Creditor A‘. Notice his DSR is only 58% (above) as compared to what everyone assumes his DSR at 113%.
So, is that a good thing? Let me know in the comments section do you have a similar assumption as well before reading this blog? Now that you are clear on how to use DSR, you need to borrow responsibly, especially during this Covid period. We’ve started to help a lot of people who over-leveraged especially when they got a pay cut. It is a very painful experience especially going through this difficult period.
I’ve been there and I went through that hardship. I just want to be able to reach out to you guys. If there’s any help that you need, follow us at J Advisory, where we specialize in helping people turn around their finances. Let me know if there’s any other misconception that you heard before. I’ll be happy to clarify it for you. Stay safe stay positive. Take care guys.