Debt Ratio|Debt Consolidation UK

Lenders look at your debt ratio to determine your credit worthiness and financial picture when evaluating your application. A debt to income ratio is used to establish if you have too much debt. Your debt ratio is calculated by dividing your debts into your income. Mortgage, credit card payments, car loans and personal loans etc. Are totalled then into your total monthly income from your wages and bonuses and any other income you may have. Many people look to debt consolidation UK as a way to improve their debt ratio. With a mortgage making up for a large percentage of peoples debt ratio, it does not take long for credit cards and personal loans and car loans to put some people into the high risk area.

What is a good debt ratio?

·         36% or Less. This is the figure lenders are looking for when evaluating your credit worthiness. This debt ratio percentage is the ideal debt load for most people to carry.

·         37% to 42%: At this ratio it may seem that your debts are still manageable, but this is the area where you need to start paying down your debts before they spiral out of control.

·         43% to 49%: If you fall into this range your debt ratio is considered high and getting out of control. You will need to take immediate action to prevent yourself from getting into financial difficulties.

·         50% and over:  In this range you need to start reducing your debt the best way you can. Luckily these days there are many financial institutions that can help people in this situation.

Many experts agree that the total amount of your gross income you pay towards your mortgage should not exceed 28%. And the total amount you pay in all debts, including car loans, credit cards, personal loans, student loans and your mortgage should not exceed 36% of your gross income. When calculating your gross income, don’t forget to include any bonuses, income from interest or dividends, social security payments (alimony or child support) and commissions.

Example:

Your total yearly gross income is $60,000

$60,000 ÷ 12 = $5,000  monthly gross income

$5,000 x .28 = $1,400  Your total your mortgage should not exceed this amount.

$5,000 x .36 = $1,800  Your limit for all debt related expenses.

Many people agree that the debt ratio is not equal for all. Say someone has a gross income of $150,000, their 36% limit would see them with $4,500 for debt related expenses. And so leaving them with $8,000 gross per month after expenses, where as in our example you would be left with $3,200 gross. So this is why some think there should be a sliding scale with debt ratio's. Whatever your case is, if you want to avoid debt consolidation you need to keep yourself withing the good limits for debt ratio.