What lenders want to know

When you go into the bank or lending institution to borrow money – whether for personal use or for your business – lenders need to decide whether or not they should lend you the money. They base the interest rate they charge on (among other things) the amount of risk they take in lending you the money and hoping for it back. If you’re a high risk borrower, they charge higher interest. If you’re a low risk borrower, they charge lower interest.

So what makes a borrower a high risk borrower? There are a few factors that include your likelihood to pay back money based on your history of paying back money.

But there’s also something called the debt-to-income ratio. This is the amount of monthly debt payments you make compared to your monthly income. It’s a number that consumers don’t often think of because those numbers are frequently disassociated in their minds but lenders are very aware! They want to know, essentially, how much of your monthly income goes towards your monthly debt. Too much of it is cause for concern because it hints that you’ve been buying on future earnings.

If you want to read more about the debt-to-income (DTI) ratio, visit FiveCentNickel.com and read “Your Debt-to-Income Ratio: What it is and why you should care“.