Your ability to obtain a loan or line of credit may depend on many factors, and your credit score isn’t the only number lenders use to decide if you are financially reliable.
Lenders will also calculate the debt-to-income ratio of a potential borrower to determine if they can afford more monthly payments.
You may calculate your debt-to-income ratio using a simple computation. By dividing all monthly debt payments by gross monthly income, you get a percentage (after moving the decimal point two places).
According to the Consumer Financial Protection Bureau, a debt-to-income ratio of 36% or less is generally excellent for homeowners, while 15% to 20% is acceptable for renters. Lenders will view you more favorably if the percentage is lower because it shows that your debts represent a smaller proportion of your income.
How much would a mortgage cost?
Monthly debt repayments for credit cards, mortgages, vehicle loans, school loans, child support, and alimony are all included. Importantly the computation substitutes the minimum combined payment for all credit cards for the amount you pay each month. Debt does not include the cost of household electricity bills, health insurance, or auto insurance.
Assume Amelia is looking to lease a car for the first time. Her net monthly income is $5,000, and her monthly debt payments comprise a $100 minimum credit-card repayment and a $400 school loan payment. With $500 divided by $5,000, Amelia’s debt-to-income ratio would be 33 percent. She would probably receive favorable treatment from vehicle lenders because of her low debt-to-income ratio.
Although your debt-to-income ratio and your credit score are unrelated (and, as a result, your credit report is unaffected), there is a somewhat synergistic link between the two.
Current debt amounts and payment history account for about 65% of your credit score, which is the criteria, credit-scoring companies use to evaluate your creditworthiness. Despite not having access to an individual’s income, credit-scoring firms can still assess the likelihood of on-time payments by looking at past behavior.
It’s important to remember that credit score isn’t the only number lenders use to make financial decisions; the factors that contribute to it are what really count.
Even if you have bad credit, our credit experts can help you if you need a new car and want to find an affordable payment plan. Contact one of our Financial Advisors at 905-956-4700 to learn more about our flexible financing alternatives. For more queries, mail us at INFO@ONTARIODRIVEZ.COM, and we will help you further.
Also Read: How Is Credit Score Calculated?
