The Finance Blogger

Debt Loan

Debt LoanThe amount of debt or loans that you are carrying at any time may affect your credit rating particularly if you have other loans, mortgage, or a number of credit cards that you have. You have to take all of the debt and loans that you currently have and the monthly payments associated with these loans to calculate whether you can afford the new debt or  loan.

Debt Loan – Manage Your Credit Rating

If you have an excellent credit rating, most banks and lenders will lend you a new loan provided that the monthly payments are no more than 35% of your cash flow. The number used to calculate this 35% includes your mortgage payment, all of your credit card payments, and all of your current loans plus the new debt or loan that you may be considering. If you only have a mortgage, perhaps a car loan and a couple of credit cards the calculation is pretty straight forward.

Consumers can calculate their debt ratio by adding up all of the monthly payments associated with all of the debt that they have including their mortgage payment and the taxes on the property. Lenders will also look at your credit cards and assume a full balance on the credit cards along with the corresponding monthly payment to obtain your total monthly payment.  This total monthly payment is then divided by the amount of money you and your spouse earn each month before taxes. If the ration is higher or close to 35% you may not be eligible for the loan you are applying for. Lenders at banks are not risk takers and this is a clear sign to them that you are a poor risk and they will turn down the loan as a result.

What If I Rent, Does the Rent Payment Count

If you rent you should add your rent payment. Once you have this total divide the total payments by the income you make on a monthly basis. This would be the gross amount of your paycheck for the month. Lenders want to make sure that you are able to pay for all of your regular living expenses which includes rent if you happen to rent a place instead of paying monthly mortgage payments along with property taxes.  The ratio should be 35% or less for an excellent credit rating.

Many people will suddenly find themselves over the 35% level and they wonder how they got there. The debt level kind of sneaks up on them and suddenly they realize they cannot get approved for a personal loan or even a mortgage on a home. By the time they pay the rent, the car loan, the payments on their credit cards, they are suddenly over the limit in terms of being able to borrow additional money. This is a difficult situation for many people who want to buy a house, buy a car or even consolidate all of their debt into one loan.

The advantage of consolidating a lot of debt into one low interest loan is that the consumers generally pays less interest and the payments are sometimes spread out over a longer period which improves their overall cash flow and allows them to get well under the 35% we discussed earlier. There is more money to pay for other monthly bills such as groceries and utilities etc which makes life a lot more comfortable. If you can avoid charging up the credit cards again you will be able to pay these loans off and improve your life even more.

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