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The Debt Ratio Amongst Banking Ratios

May 13, 2008
Often times, when a person is talking or wanting to know about banking ratios, it is most likely concerned with a loan application. This is because loan officers of financial institutions, such as banks and lending companies, go over several aspects to determine whether or not an applicant is indeed worthy to be lent money. This is where banking ratios enter the picture because one of the important aspects considered here is indeed a banking ratio, which is the debt ratio. If you are not too familiar with the debt ratio, then it could be because you know it by its other name, which is the debt to income ratio.

In its most basic form, the debt ratio is actually the total percentage of your debt to your income. If you would take a look at the stability of any company right now, in terms of operations and such, you would surely have to measure its liabilities against its assets, right? Doing so would help you gauge just how stable the company is amidst all facets in the industry. Similarly, this process of matching liabilities against assets is also done by financial institutions when dealing with consumer credit.

Banks, lending companies, and other enterprises would want for the income of their loan applicants to be significantly higher than the amount they would owe the enterprise itself. Yes, the percentages concerned here would indeed differ from one bank to another, as well as among the different types of credit. In general, however, banks prefer the debt ratios of their applicants to be below 40%. To show how the debt ratio is computed, let us say that your gross monthly income reaches $3,000. Your monthly expenses, let us say, reach $1,000. So, that would be 1,000 divided by 3,000, and then multiplied by 100. The result would be 33.34%, which is obviously less than 40%. If you have such a debt ratio, and you want to apply for a loan, then the chances of getting that loan application approved are high. But bear in mind that this is just the gross income being used here. There are some banks and lending institutions that prefer to use net income. These lenders are more of the conservative nature. Make sure to ask what particular figure your bank prefers to use for their computation.

There are also times when the bank would add a particular percentage to your debt ratio. That is, if you have dependents in your household. Since having dependents is not really out of the ordinary, then you have to keep this in mind as well. Having more dependents actually means that there are more expenses entailed for you. This can very well affect the standing of your debt ratio, and can in turn affect the chances of getting your loan application approved. So, when dealing with banking ratios, you have to be canny yourself as well. Look for that reliable bank or institution that can give you the best possible deal. Do not be afraid to shop around, for there will surely be better offers than the present offer you are considering right now.
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