Why Banks Will Loan You?
There comes a time in the life of every individual when he or she requires large amounts of money for a variety of reasons, including education, marriage, buying a home or to fund a new business. This requirement can be met by applying for a loan from financial institutions such as a bank or other institutional lenders. The process of applying for a loan has been made very easy for common people because banks consider them a low-risk investment, thus making these loans a priority sector for banks. There are many factors that banks consider before banks grant loan to people and perhaps the most important among them is the debt to income ratio .
Debt to income ratio is an important tool that helps banks to arrive at a decision as to whether to provide loan to you or not. It can therefore be termed as a tool to calculate your credit worthiness. You may be surprised that you may be denied a loan from a bank even though your credit history is good and you have never missed a payment. The real culprit may be your debt to income ratio. If this ratio is too high, it signifies that you are already spending a very high proportion of your income on repayment of loans and so you are not in a position to sustain another loan without falling into a debt trap. Your ability to secure a loan is seriously hampered if this ratio goes up.
Let us see how this simple math works. Suppose your monthly income is $5000 and you have taken several loans that you repay through EMI’s. The total of all the EMI’s come to $2500. This means that to calculate this ratio, we divide 2500 by 5000 which comes to ½. Now for lenders, if this is actually your debt to income ratio, this is too steep. They are comfortable with at best a ratio that hovers around 36%. So make this calculation at home to see where this ratio stands before going to apply for a loan from a bank. A low debt to income ratio tells bankers that you are financially much disciplined and your expenditure is in proportion to your income.
When this ratio lies between 37-42%, banks are of the opinion that it is time to manage your debts and though you can still get credit cards, you are not eligible for loans. Any ratio in the vicinity of 50% indicates you are going to face financial difficulty in the near future and you need to take corrective actions to come out of financial mess.
As you can clearly see, there is still much you can still do in order to secure a loan from a bank.