Make Your Debt to Income Ratio Work for You
Student loan debt may be holding you down and preventing you from living the life you deserve, but there is another important number you should get to know well: your debt to income ratio.
Why Your Debt to Income Ratio Matters
Though you may be in the process of digging yourself out of what often seems like a neverending pit of student loan debt, chances are you will inevitably be interested in shopping for loans for important purchases like a vehicle, house, or for starting a new business. You may even want to look into refinancing your current student loan debt if permitted. When you begin looking for that next loan or refi, banks and other lending institutions will consider your debt to income ratio when determining your eligibility and interest rate.
Freedom Beyond Loan Opportunities
Of course, the debt to income ratio is only one of several key metrics lenders use to determine eligibility, but the debt to income ratio is important beyond its ability to help you land a desired loan. It is an important indicator of your personal financial well-being. The higher your debt to income ratio, the less flexible your budget is, leaving you with less discretionary money to spend and a tighter margin for error. Working on reducing your debt to income ratio should always be a priority, as it frees you up to spend your money as you see fit rather than servicing debt on goods or services you've already consumed.
How to Calculate Your Debt to Income Ratio
Before you begin to consider a loan or simply set up your monthly budget, you must understand how the debt to income ratio is calculated. Luckily for you and every other individual who dares to better him- or herself and embark on the journey toward better financial health, arriving at your debt to income ratio is rather simple.
First, add up all of your debt obligations which will include the aforementioned student loans, credit card payments, mortgages, and other assorted debts. This can be on a monthly basis or over the entire year, but you must choose the same period of time for your debts and your income. Next, divide your total debts by your gross (before tax) income, and you have converted your debt and income into your debt to income ratio.
For example: $3,000 of monthly debt divided by $5,000 of monthly gross income (3,000/5,000) yields a debt to income ratio of 0.6 or 60%.
What is a "Good" Debt to Income Ratio?
Unfortunately, there is no definitive answer to what constitutes a "good" debt to income ratio, but institutions do have general guidelines and thresholds concerning one's debt to income ratio. A popular consumer credit reporting company, some lenders allow debt to income ratios up to 50%, while others prefer capping it off at 36%.
It is once again important to remember that other factors like collateral and credit score are considered along with your debt to income ratio and might even offset a somewhat unfavorable debt to income ratio.
Where to go Next
Now that you know what the debt to income ratio is, why it is important, and how to calculate it, you have the power to dictate your financial future. Even the student loan debt you may be saddled with can be efficiently serviced, once you better understand your options. Getting the loan you need is now a reality since you know what banks are looking for.
Yet, it is never a bad idea to have a little extra help. To learn more, reach out to National FCG today!.