Many of our projects need financing to go through. Financing institutions come in handy to assist in funding either a mortgage, car loan or student loan just to mention a few. Debt to income ratio is the major basis banking institutions use for loan disbursements. It’s the ratio of debts paid monthly to total income one gets before taxes. So, are you in need to know where you stand? The following are some of the benefits of knowing your debt to income ratio.
Benefits of knowing your debt to income ratio
Knowledge of your credit worthiness
Most financial institutions prefer a lower credit to income ratio of 36% to 40%. Knowing your ratio will enable you to determine whether you are eligible for a loan or not. You do not have to assume that you will get a mortgage from your bank without considering the possibility of meeting your obligations on time. A higher ratio will mean your debts are more thereby whatever remains may not be enough the settle monthly payments. Most banks will shy away from granting you the loan or give at very high interest rates to cover the risk.
Credit risk assessment
Even though you are not planning to get another loan anytime soon, it would be profitable to know your debt to income ratio. A higher ratio will indicate too much dependency on debt which may hinder the growth of your business. It acts as a red flag to show whether measures to reduce your debt are to be adopted. You will either reduce the debt or increase your income so as to bring the ratio down.
Cash flow analysis
Most big projects need a lot of money to implement, and their yields may take a lot of time to be achieved. Your organization or as an individual you will need to start paying for the debt almost immediately. With no other way to replace the cash outflow, only a small amount will be left for other obligations. Understanding your debt income ratio will enable you to prepare for the shortfall in advance and ensure there is enough cash flow to enable uninterrupted business or day to day life.
Having in mind the financing requirements we may need in the near future, debt planning is crucial. With the help of the debt-income ratio, one can avoid taking unnecessary debts that may hinder you from taking a more profitable loan in future.