In the financial world, loans may be regarded as either a good purpose loan or a loan, which can be avoided. A good purpose loan is one, which is required to meet the basic needs of life including educational and shelter needs. Example of Bad debts are the loans that are required to buy things, which one can live without as well. These may include credit cards and other such loans which are very costly. A few significant points that are essential for evaluating your credit situation include the following:
- Debt to Income Ratio:
This financial ratio is very important and is calculated when we divide one’s debt by one’s income. To get the figure for one month, these amounts should be on monthly basis. This ratio depicts the credit worth of the borrower and whether he or she has the capacity to furnish this loan. The financial calculations are given below:
Monthly Loan (this will include all payments like house mortgages, house rents, auto loans, equity loans for house, consumer loans, educational loans, credit cards and any other debts).
Monthly Income (Net earnings of the business or net salary, any regular bonus payments or overtimes on monthly basis, interest income or any other source of income in a month). Be careful when including any earning that is not of a fixed nature such as overtime – your employer could reduce or eliminate overtime as a cost cutting measure and your calculations would be vastly overstated.
Debt to Income Ratio = Total Monthly Loan/Total Monthly Income.
Once you have calculated the ratio you need to interpret it to find the credit worthiness of the borrower. Any ratio with a value of 36% or lower is considered to be a good credit ratio. While persons with a ratio of 30% or less have an excellent debt ratio. Any person with a ratio of 36% or more is more likely to default and hence have to pay high interest rates for any loan. A ratio that exceeds 40% would most definitely mean you have a poor credit rating for loans. Different loans require different values of debt to income ratios. The ratio can be improved by reducing the amount of debt you have or increasing your overall monthly income.
Apart from the debt to income ratio, the lenders often look at the credit history or ranking of the potential borrower. This value is calculated in a complicated financial and statistical manner and cannot be understood by a simple borrower.
It is essentially important for any person to keep a close watch on his or her financial position on a regular basis. It will help him or her assess his/her credit position and see if the loans that are outstanding against the person are satisfactory. This will help in keeping control of the person’s financial debt and avoid any bad or stressful situations. Even people with a bad credit history may be holding a loan for bad credit from http://www.creditpoor.co.uk and are likely to default on that, if the financial burden is too much. So keeping a close watch on your debt situation is vitally important for us all.