The debt ratio is explained in a clear and precise way, this is what we will do on this page.
The debt ratio, also called the debt ratio, affects your personal finances in many ways, depending on its level. You must get to know your debts well and what they are really costing you in order to keep your debt ratio at an acceptable level for financial institutions if you eventually want to obtain a loan, mortgage, or personal.
WHAT IS THE DEBT RATIO?
The debt ratio is a measure that shows how much of your income is used to pay off your debts. This is a percentage that helps lenders understand how much of your income is going directly to your debts. If you can no longer make the payment of your debts on time without using new credit, an evaluation of your personal finances is in order.
Lenders use your debt-to-equity ratio to determine if you’re in a good financial position to borrow more money—that is, if you’re creditworthy. Indeed, lenders want the assurance that you can actually repay your loans.
They prefer to do the calculations themselves to ensure that the loan payment can be included in your budget and may refuse your loan application if your debt ratio is deemed too high.
A debt ratio is also a useful tool used to assess the state of your personal finances. It helps you quickly understand the state of your debt emergency.
Financial institutions prefer debt levels below 30% and consider any debt ratio above 40% to be bad. Calculating the debt ratio is very simple, and you can calculate it yourself.
HOW TO CALCULATE THE DEBT RATIO?
To calculate your debt ratio, simply add up all of your following monthly payments: rent or mortgage payments, municipal and school taxes, electricity, heating, 50% of condo fees, home insurance, taxes, car payments, payments credit card, student loans, personal loans, line of credit, etc. and divide the total by your gross monthly income, including all your child allowances and/or child support if applicable. A budget is very useful for making this calculation.
A ratio above 40% could cause creditors to reject your loan application, regardless of the type. Moreover, it is an undeniable sign that you are likely to get into over-indebtedness.
Unlike your credit score, which indicates your past credit behavior, your debt-to-equity ratio is a reflection of your current financial situation.
HOW TO INTERPRET ITS DEBT RATIO?
Knowing your debts and your debt-to-equity ratio could prevent you from finding yourself in a situation of over-indebtedness. Making a balanced budget is a good start in this direction. Next, if you’ve done the math, as described above, let’s see what the numbers you might have gotten mean:
- 0 to 30%: excellent debt ratio
- 30 to 35%: acceptable debt ratio
- 35 to 40%: debt ratio to watch
- More than 40%: debt-at-risk ratio
Thus, if the amount used to pay your debts exceeds your gross income by 36%, you are heading towards a financial situation that is increasingly difficult to manage. A person with a debt ratio above 40% is considered risky, which means that lenders will not approve an application for a mortgage or car loan and other consumer loans.
