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Debt Service Ratio (DSR)

The Debt Service Ratio (DSR) measures the percentage of an individual’s or a company's income that goes toward servicing debt payments. It is used by lenders to assess a borrower’s ability to repay debt. For individuals, it is calculated by dividing total monthly debt payments by gross monthly income. A higher DSR indicates that a larger portion of income is being used to cover debt obligations, which may increase the risk of financial strain.

Example

An individual with $1,500 in monthly debt payments and a gross monthly income of $5,000 has a DSR of 30%, meaning 30% of their income is used for debt repayment.

Key points

• DSR measures the percentage of income used to service debt payments.

• A lower DSR indicates a healthier financial position, while a higher DSR suggests more income is going toward debt.

• Lenders use DSR to evaluate a borrower’s ability to manage debt.

Quick Answers to Curious Questions

A DSR below 30-35% is generally considered good, as it means less than a third of the borrower’s income is spent on debt repayments.

Lenders use DSR to assess whether a borrower can comfortably afford additional debt, taking into account their existing obligations.

A high DSR indicates that a large portion of income is being used to pay off debt, which may suggest financial strain or difficulty managing additional debt.