DSR in banking stands for Debt Service Ratio.
Understanding Debt Service Ratio (DSR)
The Debt Service Ratio (DSR) is a crucial metric used by banks and lenders to evaluate a borrower's ability to repay a loan. It essentially compares a borrower's income to their existing debt obligations. A high DSR indicates that a large portion of the borrower's income is already committed to debt repayment, which may make it difficult to take on additional debt.
How DSR is Used
Banks use the DSR to:
- Determine Loan Eligibility: A high DSR can result in a lower maximum loan amount or even loan denial.
- Assess Repayment Ability: It helps banks assess whether a borrower has enough income to comfortably manage loan repayments.
- Manage Risk: By analyzing DSR, banks can mitigate the risk of loan defaults.
Example of DSR Impact
Let's say you have existing debts like credit card bills, car loans, and personal loans. If your DSR is too high, a bank might:
- Offer you a smaller loan than you requested.
- Decline your loan application altogether.
This is because a high DSR signals a higher risk that you might struggle to repay the loan.
