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Debt Relief

What is Debt-to-Income Ratio?

Deciding to apply for a loan is easy, especially when you are in dire need of money. But this is not the only thing that banks will look into. Banks and lenders do not approve loans right away. They need documents and proof to find out if you have the capacity to repay the loan. Along with these, the bank or lender will also compute your debt-to-income ratio.

Debt-to-Income Ratio Defined

Also called the debt ratio, the debt-to-income ratio is a metric used to know a borrower’s capacity to repay a loan. Lenders use this to see if you are in a good financial position to apply for a loan. Lenders will use a percentage from your income to compute the ratio. If the ratio they have obtained from your income is high, there is a big chance of loan rejection.

The banks and lenders would want to ensure that you will still have a good amount of money left from your income after paying for the loan. A debt-to-income ratio is a good tool for borrowers since it helps them know how much money they will still have after paying for their debts.

Knowing the debt ratio will help borrowers decide whether they will still push through with the loan. There are instances when a borrower learns that they get approval for the loan. Yet, after knowing their debt ratio, they back out because the amount that they get is not enough for their needs. This is why it is essential to know the ratio before pushing through with the loan.

How Does the Debt-to-Income Ratio Work?

You may have come across this term when you applied for a loan. Oftentimes, borrowers do not pay much attention to it. It is because they only want to know whether their loan application gets approved or not. When asked to fill out a loan application form, you will put in information about your income and the amount you spend monthly. These are the details needed to compute the debt-to-income ratio.

What Debt-to-Income Ratio is Acceptable?

35% and Below

36% to 49%

Above 50%

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