Q: Is there more to getting approved for a loan than just A+ credit?
A: Yes! Your Ratios! (debt to income ratio and unsecured ratio)
How do you calculate your debt to income ratio?
Typically, financial institutions like to see a debt to income ratio of 40% or less. If you exceed 40%, this could raise concern that you’re not going to be able to comfortably pay back the debt you’re trying to obtain. To calculate your debt to income ratio, divide your minimum monthly payments (mortgage, secured loans, credit cards, and lines of credits) by your gross monthly income.
Mortgage: $ 600
car loan: $ 150
credit cards: $ 350
Total monthly debt payments: $ 1,100
Gross monthly income: $3,000
Debt to income ratio: (1,100÷3,000) 37%
How do you calculate your unsecured ratio?
In addition, financial institutions like to see an unsecured ratio of 20% or less. To determine your unsecured ratio, divide the total balances for your unsecured debt (credit cards, lines of credit, etc.) by your gross annual income.
Credit cards: $ 4,200
Personal line of credit: $ 3,000
Total annual debt: $ 7,200
Gross annual income: $ 36,000
Unsecured ratio: ($7,200÷$36,000) 20%
Debt to income and unsecured ratios play a key role in the approval of a loan.
Knowing your ratios can help you determine if it is a good time to request a loan or to call and speak to a loan professional about other options.
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Jason Felch is a senior member service consultant in our Berlin branch, and has worked for VSECU just over 6 years. He thrives on the ability of helping VSECU’s members find the best loan product to fit their needs. His passion is helping members consolidate their debt for their better financial well-being.