The impact of debt-to-income ratios on loan approvals has become an increasingly common theme in IELTS Writing Task 2 essays, particularly in questions about personal finance and economic responsibility. Based on analysis of past exam papers and importance of keeping low debt-to-income ratios, this topic has appeared in various forms over the last 5 years, especially in questions about financial literacy and responsible borrowing.
Some people believe that banks should only approve loans for individuals with low debt-to-income ratios, while others argue this approach is too restrictive and unfair. Discuss both views and give your opinion.
Analysis of the Question
This question requires candidates to:
- Examine both perspectives on loan approval criteria
- Discuss the role of debt-to-income ratios in lending decisions
- Present and justify their personal viewpoint
- Provide relevant examples and supporting evidence
Understanding debt to income ratio impact on loan approval process
Sample Essay 1 (Band 8.5)
The debate over whether financial institutions should strictly adhere to debt-to-income ratios when evaluating loan applications has significant implications for both economic stability and social equity. While I understand the arguments for more flexible lending criteria, I largely support the conservative approach of prioritizing low debt-to-income ratios.
Those who advocate for stricter lending standards based on debt-to-income ratios present compelling arguments. First and foremost, this metric serves as a reliable predictor of loan repayment capability, helping prevent defaults and maintaining financial system stability. Moreover, as demonstrated by how rising interest rates affect creditworthiness, individuals with lower debt obligations are better positioned to weather economic uncertainties and interest rate fluctuations.
However, critics of this approach raise valid concerns about accessibility and fairness. They argue that strict debt-to-income requirements disproportionately affect young professionals and entrepreneurs who may have higher initial debt levels but strong future earning potential. Additionally, this policy might exclude individuals from marginalized communities who have historically had limited access to traditional financial services.
In my view, while these concerns merit consideration, the benefits of maintaining strict debt-to-income criteria outweigh the drawbacks. Banks can mitigate fairness issues by implementing alternative assessment methods alongside debt-to-income ratios, such as considering future earning potential and offering specialized programs for underserved communities. This approach, similar to choosing the right mortgage for homebuyers, ensures both financial stability and responsible lending practices.
To conclude, while strict debt-to-income requirements may seem restrictive, they ultimately protect both borrowers and lenders while promoting financial stability. The key lies in implementing these criteria thoughtfully while developing complementary solutions to address accessibility concerns.
Banking professional evaluating loan applications with debt ratio charts
Sample Essay 2 (Band 6.5)
The question of whether banks should only give loans to people with low debt-to-income ratios is very important today. There are different opinions about this issue, and I will discuss both sides.
Some people think banks should be strict about debt-to-income ratios. They say this helps prevent people from borrowing too much money and getting into financial trouble. For example, if someone already has lots of debt, they might not be able to pay back another loan. This could be bad for both the person and the bank.
On the other hand, other people think this rule is too strict. They say many good borrowers might be rejected just because of this one number. For instance, young people who just finished university might have student loans but also good job prospects. These people could probably pay back their loans in the future.
In my opinion, I think banks should look at debt-to-income ratios but not make it the only factor. importance of credit monitoring for loan approvals shows that other things like job stability and credit history are also important. Banks should consider the whole picture when deciding about loans.
To conclude, while debt-to-income ratios are important, banks should use them as part of a bigger evaluation process. This would be fairer and more effective.
Key Vocabulary
- debt-to-income ratio (n.) /det tu ˈɪnkʌm ˈreɪʃiəʊ/ – the percentage of monthly income that goes to paying debts
- lending criteria (n.) /ˈlendɪŋ kraɪˈtɪəriə/ – standards used to evaluate loan applications
- financial stability (n.) /faɪˈnænʃəl stəˈbɪləti/ – condition of having a reliable financial system
- disproportionately (adv.) /ˌdɪsprəˈpɔːʃənətli/ – in a way that is too large or too small in comparison
- marginalized communities (n.) /ˈmɑːdʒɪnəlaɪzd kəˈmjuːnətiz/ – groups excluded from mainstream social, economic activities
Practice Exercise
Try writing your own essay addressing this alternative question:
“Some experts suggest that governments should set maximum debt-to-income ratios for all types of loans. To what extent do you agree or disagree?”
Share your practice essays in the comments section for feedback and discussion. Remember to maintain a balanced argument and support your points with relevant examples.
