Are you in the process of requesting a loan from a financial institution in Barbados?
If you are, you should take the time to understand what bankers mean when they say your Debt Service Coverage Ratio (DSCR) needs to be calculated. It’s a key ratio that helps Banks determine whether you can afford to repay the requested loan facility. But how is it calculated?
DSCR is calculated by totaling all your monthly loan commitments (e.g., credit cards, unsecured loans, hire purchase loans, land loans, and mortgages) and dividing this figure by your Gross Monthly Salary.
With credit cards, banks in Barbados usually use 5% of the limit to determine the minimum amount of funds you will need to repay monthly. It does not matter what your outstanding balance is on the credit card—the limit is used to determine your minimum monthly commitment.
Your Gross Monthly Salary is the amount you are paid monthly before any deductions, such as PAYE and NIS, are subtracted. You can find this amount on your pay slip.
How to Calculate your DSCR – An Example
Let’s look at an example of a customer called John Doe # 1. In this scenario, the customer requests an unsecured loan with a monthly payment of $450. Consideration needs to be taken of his existing loan facilities to determine if he can qualify for this additional loan:-
John Doe # 1
Monthly Gross Salary $5,000
Loans:
The proposed unsecured loan’s monthly payment is $450
Credit Card Limit $3,000
Hire Purchase Account $50 monthly
Based on the information above, John Doe #1’s DSCR will be 13%. See calculations below:-
- $450 + (3,000 * 0.05 = $150) + $50 / $5,000 = $650/ $5,000 which equates to 13%
Now, if the Bank you have chosen to approach requires that their customers’ DSCR be below 40% – as is customary in Barbados – then this will mean that your DSCR is acceptable. It is very important that you know your own DSCR before approaching the Bank to guarantee approval. It also means you are better positioned to negotiate your terms and conditions.
Now, what if John Doe’s situation were a lot different? Let us see another example. The customer is requesting the same unsecured loan facility, but he has an additional mortgage payment that needs to be taken into consideration when analyzing his DSCR:-
John Doe #2
Monthly Gross Salary $5,000
Loans:
The proposed unsecured loan’s monthly payment is $450
Mortgage Facility $1,500
Credit Card Limit $3,000
Hire Purchase Account $50 monthly
Based on the information above, John Doe’s DSCR will be 43%. See calculations below:-
- $1,500 + $450 + (3,000 * 0.05 = $150) + $50 / $5,000 = $2,150/ $5,000 which equates to 43%
In the above incident, Mr. John Doe # 2 will not qualify for the proposed Unsecured Loan he requested if the Bank in Barbados’ threshold for DSCR is 40%.
Many more factors influence whether you qualify for a loan, but this is a key determining factor. Banks make their profits by interest revenue, and therefore, no further analysis will be done if it is determined that you cannot repay the proposed loan facility.
If you have any questions, please do not hesitate to contact us at support@afbconsultingservices.com