When applying for a personal loan in the UAE, one of the most important factors banks will consider is your Debt Burden Ratio (DBR). This ratio is crucial because it helps lenders determine whether or not you can afford to take on more debt based on your existing financial commitments. In this post, I’ll explain what DBR is, how it’s calculated, and why it matters when it comes to securing a personal loan.
What Is Debt Burden Ratio (DBR)?
The Debt Burden Ratio (DBR) is a measurement used by UAE banks to assess how much of your monthly income is used to repay debts. This includes all types of debt, such as personal loans, car loans, credit cards, and any other forms of borrowing.
According to UAE law, your DBR must not exceed 50%. This means that no more than half of your monthly salary should be used to pay off your debts. If your DBR is higher than this, it’s very likely that your loan application will be rejected or you’ll be offered less favorable terms.
How Is DBR Calculated?
DBR is calculated by adding up all your monthly debt payments and dividing that total by your monthly income. Here’s a simple formula to calculate your DBR:
DBR = (Total Monthly Debt Payments ÷ Monthly Income) x 100For example, if your monthly debt payments total 2,000 AED and your monthly income is 6,000 AED, your DBR would be:
DBR = (2,000 ÷ 6,000) x 100 = 33.3%This means that 33.3% of your income goes towards paying off debt, which is well within the 50% limit.
Why Is DBR Important for Loan Eligibility?
The DBR limit of 50% exists to protect both borrowers and lenders. For banks, it’s a way to minimize risk by ensuring that borrowers don’t take on more debt than they can realistically handle. For borrowers, it helps prevent overborrowing and reduces the risk of falling into financial difficulties due to excessive debt.
If your DBR is too high, banks may either reject your loan application outright or offer you less favorable terms, such as a lower loan amount or higher interest rates. On the other hand, if you have a low DBR, banks may be more willing to lend you larger amounts with better terms.
How to Lower Your DBR
If your DBR is above 50% and you’re looking to improve your chances of getting a loan, here are some strategies to lower it:
1. Pay Off Existing Debts
One of the most effective ways to lower your DBR is to pay off some of your existing debts. This can reduce your monthly debt obligations and bring your DBR down to a more acceptable level. Start with high-interest debts like credit cards, as these can free up more of your income for future loans.
2. Consolidate Debts
Debt consolidation allows you to combine multiple debts into a single loan with one monthly payment. This can lower your interest rates and reduce your total monthly payments, which in turn can lower your DBR. Be sure to check the terms and fees associated with debt consolidation before proceeding.
3. Increase Your Income
Another way to reduce your DBR is by increasing your monthly income. This might not be a quick fix, but taking on a part-time job, freelancing, or finding other sources of income can help bring your DBR down.
4. Avoid Taking on New Debt
If your DBR is already close to the 50% threshold, avoid taking on new debt until you’ve paid off some of your existing obligations. Adding more debt will only increase your DBR and make it harder to qualify for a loan.
What to Do If Your DBR Is High
If your DBR is above 50% and you still need a loan, there are a few options you can consider:
- Seek a Smaller Loan: If your DBR is slightly above the 50% limit, applying for a smaller loan might still be an option. This will reduce your monthly payment obligations and help you stay within the DBR limit.
- Increase Your Loan Term: By choosing a longer loan term, you can reduce the size of your monthly payments, which can help lower your DBR. Keep in mind, though, that a longer loan term means you’ll be paying more interest over time.
- Explore Alternative Financing: If your DBR is too high for traditional loans, you may want to explore alternatives like peer-to-peer lending or salary advances, which might have more flexible criteria.
Final Thoughts
Understanding and managing your Debt Burden Ratio (DBR) is key to securing a personal loan in the UAE. Banks use this calculation to assess your ability to repay a loan, and keeping your DBR below 50% is essential for getting loan approval with favorable terms. If your DBR is too high, focus on paying off existing debt, consolidating your loans, or finding ways to increase your income before applying for a new loan.
