The debt ratio in your life
The debt ratio is a unit of measurement, an index to assess a household’s ability to repay a loan. We regularly hear about the debt ratio which is actually a synonym for the debt ratio. Whenever we want to obtain credit in the form of a loan from a financial institution, the advisor will assess the ratio between your monthly financial charges (the debt ratio ) which is the equivalent of the payments allocated to the debts and the gross income available.
It is the debt ratio combined with the credit rating that will often determine the procedure that will be the most appropriate for resolving financial difficulties related to indebtedness. Here is a simple way to approximate the home debt ratio:
- add debts in the form of monthly payments such as rent (or monthly mortgage payment), home insurance, taxes, car loan, student loan, credit cards, etc. It should be noted that expenditures such as food, utilities (telephone, transport, etc.) should not be considered in the calculation as it is not considered to be debt-generating expenditure;
- Then, divide the total amount of monthly payments by gross monthly income, that is, before-tax income.
Calculate the debt ratio/ratio
There is a ratio not to be exceeded in order to obtain additional credit and this is one of the criteria to consider when applying for a loan or even debt reconciliation. Here is an overview of how an advisor will interpret the outcome of your debt ratio :
- debt ratio of 30% = Excellent;
- debt ratio of 30% to 36% = Good;
- debt ratio above 40% = Difficult.
A debt ratio higher than 40% also means that it will be more difficult to repay the loan or financing that has been granted because the debt ratio takes into account your current income compared to the credit rating that is in make the history of your credit.
The debt ratio is one of the tools that allows you to have an overview of your financial situation. It is prudent and advisable to consult insolvency professionals when the debt ratio is very high and the difficulties to repay the monthly payments are important in order to find solutions adapted to each of the financial profiles. At Rodion Raskolnikov, our experienced team of advisors and trustees stand out for their humane and personalized approach. The integrity of our members and the satisfaction of our customers are at the heart of our firm’s core values.