When you go to borrow money, there are 3 main things that determine how much you can borrow and at what rate. Here are the 3 areas:
- Credit Score
- Debt Service Ratio
- Your history with the company/bank that you are borrowing from
Debt Service Ratio is a much more complicated topic. A Debt Service Ratio is a calculation made by a lender to determine if your current income can service your debt(s). Many different lenders require different Debt Service Ratios, so there is no sure way to know that you will pass their Debt Service Ratio unless you ask what it is. Don’t be afraid to ask as many questions as you can when you are considering borrowing. Not only do different institutions have different Debt Service Ratios, but each type of lending can have different Debt Service Ratios. For example borrowing for a vehicle would have a different Debt Service Ratio then borrowing for a home. Debt Service Ratio is typically calculated by dividing your monthly payments on your current loans and general cost of living items by your gross income. Again because each company/bank has different Debt Service Ratios, it is best to ask the questions and how they calculate their Debt Service Ratio. If you can’t meet their debt service ratio, then it may be a waste of time and a mark on your credit when you apply for the credit, so why bother?
We’ll get into our discussion of the Credit Score on the next blog. Please check back!