The debt level calculation consists of comparing your income and your outgoings to evaluate the percentage of income taken up by recurring expenses. Calculation of income includes the following: salary after tax, other work-related income (profits from self employment for farmers, retail outlets, tradesmen and independent professionals), court-ordered maintenance payments, and other welfare payments such as pensions or incapacity payouts. Depending on the lender, other income might be included, such as family allowance, housing benefit, welfare, or commissions such as might be earned by sales representatives. Irregular income, such as one-off bonus payments or work-related compensation, is not included. As regards outgoings, the debt level calculation before new borrowing includes monthly repayments for current loans (consumer loans, vehicle loans, home loans if you are already a homeowner), monthly rental payments (if you are a tenant and your loan is not a home loan), maintenance payments to your spouse and any other recurring outgoings (telephone, gas, electricity, etc. bills).
Let’s take a simple example. Imagine a couple, with net aggregate monthly income of €8,000 and monthly outgoings of €1,600 (€1,200 miscellaneous costs and €400 on car loan repayments). Their current debt level is 20% (€1,600 / €8,000 x 100). For most financial institutions, when outgoings are more than a third of monthly income, the risk of excessive indebtedness or insolvency strongly increases. The income remaining to pay ongoing costs and provide room for manoeuvre for contingencies is limited, and exposes the borrower to potential difficulties. In our example, the borrowing capacity available to the couple is €1,040 (€8,000 x 33% - €1,000) per month. Above this sum, the bank could refuse to grant the loan... unless the calculation of disposable income is favourable to them.