Question

You want a bank loan in order to buy a car (with no down payment of your own). You already own a house on which you pay $1,600 per month in mortgage payments, $300 per month in property taxes and $100 per month in utilities. Your gross family income is $80,000 per year. You have no other debts. The bank is willing to give you a loan which will be amortized over 5 years (i.e., 60 monthly payments). The interest rate is 6% p.a. (APR). Based on a Total Debt Service ratio of 40% (maximum), what is the maximum loan that the bank would grant you?

Answer 1

Total debt service ratio is a measurement of how much a person owes in comparison to its income. It is calculated total debt divided by gross income multiplied by hundred.

As the maximum total debt service ratio is 40%, it means i can take upto 40% of my annual income as debt. As i already have $24000 debt, means i can only spend $8000 per annum on the car loan.

Interest rate on loan is 6% and total payment for car loan is $8000, so the principal loan amount is Rp.7547 (8000/106%).

So we can say that bank can give maximum loan of 7547*5= 37735 Rp.