What is DEBT SERVICING AND what are debt RATIOS? | Foresters Community Finance

What is DEBT SERVICING AND what are debt RATIOS?

Many things are classified as debt servicing obligations, for example:

  • rent for where you live, or
  • education for your future workforce plans, or
  • someone giving you spread of payment terms so you can enjoy a new phone, or
  • paying off a car to get around.

These financial commitments are put into calculations that are used to determine your capacity to make repayments on a debt. But a great debt ratio is only one part of the decision to loan money. Your abilities and stability are character drivers that we review as part of what we term  “the willingness to repay” a loan.

Responsible lending is all about helping you to

  • understand your current debt obligations, and
  • prove your creditworthiness.

First part – How you can do your own debt to income ratio calculation

The debt to income ratio shows how much of your monthly income goes towards debt payments.

To get this ratio:

Firstly add together all your monthly debt (who you have borrowed off already and need to repay) payments and total them. Then divide that total by your income.

Example: Power Bill $140 + Tuition $110 + Car $150 + Mobile $50 = $450

assume you earn $2,500 per month and all your debts add to $450. $450 is divided by $2,500 which is a ratio of 0.18. Converting that to a percentage is 18% of debt to income.

This calculation is your ready reckoning. It is important to remember that this is only a rule of thumb.

Second part – Combine your ability, stability and willingness to repay.

As you repay, your successful repayment history, shows a lender that you can cope, if something happens to your income or in an emergency.

So even when everything else seems right, a loan maybe declined because a repayment doubt exists. Sources of doubt are many. But typical reasons why a borrower can repay, but chooses not to are:

  • Prioritising debt accounts. The borrower has limited funds, and pays some debtors first, before the others. Some lenders will lose out if this decision is made.
  • Unwilling to continue to pay joint/partner/support accounts. Over time due to deterioration in the relationship, enthusiasm wanes about continuing to repay a joint debt.
  • Lack of ongoing perceived value. A good example is a car which is no longer working. The debt is still obliged to be repaid.

Your responsible attitude toward paying bills and meeting obligations on time, along with a good debt to income ratio helps prove your creditworthiness.

Foresters Community Finance provides Community Loans, for any worthwhile purpose.

debt servicing and ratio