Debt ratio

11 avril 2022

The expression “debt ratio” is used by your banker if you ask him for a loan. If this results in a debt ratio of more than 30% for you, it is likely that he will refuse it to you.

Do not confuse debt ratio … and debt ratio!

Elsewhere in this site you will be able to read that the average debt ratio of French households is around 98.1% which is still quite reasonable compared to the situation of English or American households which are around 130%. But reasonable or not, 98.1% is still almost three times more than your banker's 30% limit.

In both cases, the expression debt ratio is used with a different definition and the meaning must not be mistaken.

1. The debt ratio

The debt ratio that you need to calculate when you plan to take out a loan and which should be one of the criteria for your banker's response is the ratio between the financial charges (monthly payments) linked to all of your loans and your monthly income. Indeed, it is with your income that you will pay the monthly payments related to your loans. If their weight in the monthly income is too heavy, you risk not having enough to meet other expenses. 30% is considered a limit not to be exceeded, although this constraint will be relatively weaker if your income is very high. From 2022, the debt ratio may not (with rare exceptions) exceed 35%.

To take stock of your personal situation, use our calculator.

2. The average household debt ratio

The average household debt ratio calculated in national statistics is the ratio between outstanding loans granted to households by financial institutions and their gross disposable income.

In the 1st quarter of 2020, the total outstanding amount of loans granted to households was 1,489 billion euros. During this same period, the gross disposable income of households was 1,518 billion euros. This therefore corresponds to an average household debt ratio of 98.08% (i.e. 1,489/1,518). This is an overall indication of the extent of indebtedness (and not of the repayment burden as in the 1st definition) relative to income, but the actual levy on income will depend on the average duration of the loans and the interest rates interest charged.

3. Example:

A couple earns 3,500 euros net per month. This couple took out a home loan of 150,000 euros over 15 years (at the rate of 2% including insurance).

Monthly payment: 1,000 euros

Debt ratio (in the sense of the weight of financial charges in income): €1,000 / €3,500 = 28.6%

This amount is less than 30% of the couple's resources. But it's limited. If he asks for a new credit, it is likely to be refused and that would not be reasonable.

As for his debt ratio (in the sense of the weight of debts in relation to income, as calculated in national statistics), it amounts to more than 300% of his annual gross disposable income (approximately 178,000 euros of outstanding loans still to be paid / an annual income of 42,000 euros)!