“How much debt can I have?” This is the question we have all asked ourselves at some point of our lives. Usually right before an important life event, such as taking out a housing or car loan. This article will reveal how you can calculate your creditworthiness and things to pay attention to during this process.
The process of taking out a bank loan
When signing a credit contract, the business bank places at the borrower’s disposal a certain amount of monetary funds. This is the moment when the user forms an obligation that they will - in a specified time period and through an established payment dynamic - return the agreed-upon loan to the bank, along with the accompanying interest and expenses.
In order for the bank to be sure that the borrower will fulfill their obligation, their creditworthiness is established before the credit is approved. Creditworthiness represents an estimation of how likely the client will be able to pay back their dues in the agreed-upon time period. Through a quality check of their clients’ creditworthiness, the banks reduce risks of poor placements and build a quality portfolio for themselves.
In order for the client’s (debtor, joint debtor, guarantor) creditworthiness to be estimated, the bank will use the following information:
regular income
employment status
statement from the borrower’s employer
the current dues that the borrower has across all financial institutions (banks, leasing agencies)
the client’s credit history
The potential debtor has to satisfy the bank’s criteria when it comes to regular payments of their existing dues (which is done by looking into the report from the credit bureau) as well as a sufficient free portion of regular income which is determined through mathematically calculating their creditworthiness.
It’s important to note that the baseline for determining the client’s creditworthiness consists of the monthly income, or rather a 6-month or a 3-month income average which is calculated from payment sheets and statements on the client’s monthly income or pension checks when it comes to pensioners.
The regulation from the National bank of Serbia defines a framework for the maximum highest credit debt a citizen can have, while business banks retain the right to calculate their clients’ maximum debt according to their internal policies.
How is creditworthiness determined?
As stated earlier, creditworthiness is usually determined when taking out a housing or car loan. But we shouldn’t forget that creditworthiness is the baseline for any credit-related cooperation with any bank, including overdraft and cash credit for example.
The methodology of determining creditworthiness includes a collection of rules and policies which the banks use to define the criteria and the approval process for the credit arrangements. The main criterion that a private citizen should fulfill is the ratio adequacy which represents the ratio between their current credit debt and their monthly income.
Over the last decade, the DTI ratio has fluctuated between 30%, then 40%, only to reach around 50-60% of the monthly income reservation for credit debts in Serbia at the start of 2013.
Certain banks will apply a formula when calculating the client’s creditworthiness which subtracts the value of their expenses from their six-month income average. The client can then expect to be in debt for the 30-60% of the remaining sum, depending on their income.
Most banks will calculate the client’s maximum creditworthiness at 30-60% of their net earnings, depending on their income amount. If the client’s income is below 30.000rsd per month, the maximum debt they can have is up to 35%. Clients with incomes between 30.000 and 40.000 can have up to 50% debt.
It’s important to note that banks account for all the credit card dues when calculating credit debt, including the overdraft and all types of credits.
An example of how one business bank calculates creditworthiness
The client’s income is 62.000rsd x 60% = 37.200,00rsd of maximum monthly dues (overdraft, credit cards, all types of credits).
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