Carrying out a loan asks consumers to take stock of their financial situation: what is their borrowing capacity? is he in over-indebtedness? what monthly payment? For how long ? So many questions that must be answered in order not to be denied credit or not be able to honor your repayments. Here is a short guide that will help consumers navigate the terms and procedures to follow when calculating credit.
The debt ratio
We speak of over-indebtedness when the individual finds himself in a critical financial situation, no longer allowing him to honor his debts (article L.330-1 of the consumer code). In order not to arrive at such a situation and to be forced to file an over-indebtedness file with the Bank of United States, the individual can estimate his debt ratio. Thus, when calculating credit, determining its debt ratio will go through the analysis of its financial situation.
For this, the individual must take into account all the sources of fixed income that he receives as well as all the fixed charges that he must honor. Among the resources taken into account, it will therefore be necessary to include net salaries (including bonuses and / or, where applicable, the 13th month), non-salaried professional income (namely the profits of farmers, traders, artisans or liberal professions), maintenance payments subject to a court decision and finally other types of pensions such as pensions, handicaps, war soldiers' pensions etc. Any professional or exceptional premium or indemnity is excluded from this calculation.
However, the income taken into account may vary depending on the institution that performs the credit calculation. Thus to this fixed income can be added the commissions of the sales representatives (according to their seniority), the family allowances (it is however very rare that they are recorded, except where applicable if they are received during the duration of the credit) , housing allowances or property income.
It is then enough to calculate the share of these expenses on the totality of the budget, namely to divide the expenses by the income and to multiply by 100 the result which makes it possible to obtain the debt ratio.
If this debt ratio is less than 33%, the individual will be able to claim a loan. On the other hand, when calculating credit, if the individual is indebted to more than 33%, the latter finds himself in the situation of over-indebtedness. It will then be difficult for him to borrow. This rate is not a regulatory rate, it is a rate for common use.
However, situations are generally studied on a case-by-case basis in banking establishments. If the individual justifies high income, it is possible that his debt ratio will be revised upwards (35% or more), in the event that he manages to justify to the creditor institution his capacity to repay. In the opposite case, or when the individual benefits from low income, when calculating the credit it is the family quotient that will be taken into account.
The family quotient is therefore an index on which the banks will refer when the income of consumers is too modest to obtain a loan, mainly in the case of a mortgage. For this, the law has defined a minimum family quotient: this family quotient must not be less than 4,800 US dollars per year and per person.
The calculation of the family quotient is quite simple: after having added all the household income, it is necessary to subtract the amount of the monthly loan payments in short and divide the result by the number of people in the household.
In the event that the quotient is less than 4800 US dollars, the loan will be refused to the consumer. This index is subjective, it does not take into account the lifestyle of households. In the event that the household has a quotient of less than 4,800 US dollars per person, the solution for the credit calculation will be to go through a credit consolidation in order to alleviate the part linked to debt repayments.
Remains to live
To be able to subscribe to a loan, when calculating the loan, the individual must be interested in his share of "remainder to live", namely the sum that remains to honor the fixed non-compressible charges.
It is quite simple for the individual to estimate his remainder to live. The estimate is made by subtracting from the fixed income (namely salaries as well as any allowances, family allowances, etc.) of the household the sum of fixed charges such as rent, charges such as water and electricity bills, heating, any pensions paid, monthly tax payments, credit repayments etc. According to the consumer code, the remainder to be lived for a single person cannot be less than the amount of the RSA (article R331.10.2). This amount is increased by 50% for a couple. The RSA amount on October 1, 2016 is US $ 535.17 for a single person without children.
Loan calculation: the monthly payment
Once the individual has estimated his debt ratio as well as his share of the remainder to be lived, he can calculate the monthly payments that he can devote to his future loan. For this, the consumer can perform a quick calculation.
In carrying out the credit calculation, it will therefore be sufficient to multiply the sum of the net income by the maximum debt ratio (namely 33%) and to subtract from this result the current borrowing charges.
Take the example of an individual who has a monthly net income of 3000 US dollars, if he has no charges, his monthly borrowing capacity is 990 US dollars (3000 x 0.33). If the individual has a consumer loan (for example for the repayment of a car) with a monthly payment of 150 US dollars, he will therefore have a borrowing capacity for his new loan of 840 US dollars (3000x0.33 - 150 ).
It is important to specify that when the individual calculates his monthly borrowing capacity, the costs related to the credit are included in this monthly payment (interest and costs related to the insurance).
Credit interest rate
After having estimated his monthly repayment capacity, the individual can be interested in the interest rates of the credits in force when he wishes to subscribe to a loan. To do this, he may refer to the banking rate grids available on certain websites. These rates vary over time but also depending on the credit, the repayment period and the institution requested by the borrower. The consumer will therefore have to obtain the best credit offer, carry out comparisons to find the best rate. The longer the loan is made over a long period, the higher the interest rate will be. Indeed, credit institutions take more risk to lend money over the long term. To prevent its risks, they increase the costs associated with the cost of credit.
From the estimate of monthly payments, as well as the rate in force for the desired credit, the individual will finally be able to estimate his total borrowing capacity. This amount will also depend on various parameters namely: the monthly payment, the interest rate of the loan as well as the duration of the loan.
By applying the following formula, the consumer will therefore be able to determine his borrowing capacity:
Amount of loanable capital:
(M (1 - (1 + (r / n)) - n)) / (r / n)
M: the monthly payment that the individual can allocate to his loan
r: interest rate of the loan
N: Total number of annuities x reimbursements per year
n: number of annuities per year
If we take the example of a loan with an interest rate of 4.5% per year, over a period of 20 years (i.e. 240 months) and a monthly repayment capacity of 1265.30 US dollars, the individual on the based on the previous formula may borrow a capital of:
Borrowing capital =
(1265.30 (1- (1+ (0.045 / 12))) - 240) / (0.045 / 12)
= 20,000ª0 US dollars
When the consumer therefore seeks to perform the loan calculation, in order to properly target his needs according to his financial capacities, he will have to be interested in these different parameters. The consumer will be able, after having become aware of his repayment capacity, to negotiate an interesting offer with credit institutions. The consumer must also be aware of the risks associated with a situation of over-indebtedness (Bank of United States file, Forbidden banking, etc.). If the consumer is already in a critical situation, before making a new loan, it is possible for him to carry out a credit consolidation in order to increase his remainder to live, and therefore reduce the part of his budget allocated to the repayment of his debts. Applying for credit must therefore be well studied and thought out. Although there are risks, a loan can be a boon to boost the purchasing power of individuals.