Debt ratio might be an unfamiliar term for many borrowers and, in fact, small percentage of people ever wonders what it is. From the first sight, there is no need to learn what debt ratio is and why it is important in your financial routine. A more deliberate approach towards financial issues will prove that debt ratio is a vital component of all lending activities. That is because lenders decide on their clients’ creditworthiness by means of debt ratio tools and calculations.
Divide your total income amount by your total debt amount – and you have your
debt ratio
. Whenever you apply for a loan the bank wants to be sure you have enough income to pay the borrowed amount back. There is a number of tools that banks and other lenders use to estimate your credibility, and calculating your
debt ratio
is one of them. They have to make sure your total debt doesn’t exceed a certain required percentage of your income. The banks usually require this percentage as 36-42. This percentage is the