Almost 1 in 4 French people say they experience financial difficulties. Whether you are facing this situation or looking to borrow new sums, it is important to have a precise vision of your debt level. What are debt and over-indebtedness? How to calculate your income, expenses, and debt ratio? For you, Solution Crédits takes stock.
Do not confuse debt and over-indebtedness.
A recent study revealed that 81% of French people have observed a decline in their purchasing power in recent years. It is also one of the reasons why many French households have taken out a loan. Indeed, whether it is to build up a property portfolio or to equip oneself, credit is a practical and healthy way of financing new acquisitions. However, it is important to master the rules and not to be overwhelmed by debts, otherwise you will face a situation of over-indebtedness.
In French law, over-indebtedness is “a situation of financial distress characterized by the impossibility for a debtor, in good faith, to face all of his non-professional debts due or due”. The Council of Europe defines over-indebtedness as being “the situation where the debt obligation of a person or a family clearly exceeds and over a long period its repayment capacity. “
In practice, you can face the settlement of your debts and still find yourself close to a situation of over-indebtedness when your charges become too heavy to bear. You will then have to combine with a reduced living space and you will have difficulty maintaining the balance of your budget.
What is the debt ratio?
The debt ratio is a means of measuring which makes it possible to assess the level of debts of a company or an individual with regard to its equity (or its income for an individual). To calculate it, you will need to divide the total amount of your monthly payments by that of your monthly income.
This debt ratio is often used as a benchmark by banks and lending institutions when assessing your ability to repay a loan. In general, if your debt ratio exceeds 33% of your income, it is unlikely that the bank will grant you the credit you are requesting.
First, assess your monthly income
Only your regular income will be taken into account. If you sometimes receive occasional income, it is not taken into account in order to calculate the most representative of your debt level.
The safest way to calculate your income is to carry out a small simple operation: take your most recent tax notice and note the taxable base as it is written on this statement. Then, you add to this figure, the sum of your last three net monthly incomes that you will find on your last 3 payslips. Then simply divide this total by 15 to get your average monthly income.
Then calculate your current monthly payments
To calculate your financial debts, you will take the amortization tables for all of your outstanding loans (excluding rental investments). Make sure you don’t forget any credits, as the lending institution you are requesting will have access to all of your borrowing costs. Then carry out the addition of the monthly payments to obtain the total monthly payment of your loans.
If you have made rental investments associated with loans, carry out the same calculation for your loans linked to these investments, and note the result.
Finally, calculate your debt ratio
You have calculated your resources and you have also assessed your financial charges. From now on, to know your debt ratio, you just have to do the following operation: The amount of your monthly payments divided by the amount of your monthly income. You then get a percentage that corresponds to your debt ratio.
For rental investors, an additional operation will be necessary. You will have to add the debt rate calculated previously with this: [Credit monthly payments – (Gross rent × 70%)] / Amount of monthly income. By adding the two rates, households that have made a rental investment will obtain their total debt ratio, which will be the one on which financial organizations will base their decision whether or not to grant them new loans.