Best Payday and Loans News

Another important measure and motivating factor as you do battle with debt is whether or not you could get pre-qualified or pre-approved for a loan if you really wanted one. What if your car needs a major repair and you’d rather just buy a new one instead of repairing the old? What if you found the house of your dreams?

Aside from credit cards, which companies seem to hand out like candy on Halloween, many loans are approved based on a couple of key ratios that consider your monthly debt service. Now granted, you still have to have a good credit score, but many lenders would not approve someone with the best credit score if they fell outside these ratios:

A front-end ratio is a comparison of your loan payment for the purchase you’re making against your total household pre-tax monthly income. For example, a $500 payment compared against a $2,000 per month income would give you a front-end ratio of 25% ($500 divided by $2,000). For most car and home loans, the front-end ratio needs to be in the ballpark of 30%, though this changes based on the lender and the size of the loan.

A back-end ratio is a comparison of the payment on the loan you’re applying for plus all your other types of monthly debt service, compared against your income. (This is the one that gets most people denied for a loan.) For example, the back-end ratio on a new monthly car payment of $500 and an existing monthly mortgage payment of $1,000, when compared against $2,000 in monthly income, would be 75% ($1,500 divided by $2,000). For most auto and home loans, the maximum back-end ratio is 50%, though 35–40% is common.

So what is your back-end ratio? Let’s figure them out:

Total monthly debt payments (short + long term) $________
Total monthly income before taxes $________
Back-end ratio (monthly debt payments divided by your income) $________

As big and bad as these numbers may be, it’s probably not the balance that is causing you the biggest problems. Rather, it’s probably your monthly payments or debt service. Virtually everything in your financial world, from bills to paychecks, operates on a monthly basis. Injecting $200, $500, or $1,000 of debt service can make surviving month to month utterly exhausting.

Just as you did with your total balances, add up all your required payments before you try and pay any extra, breaking them down into those categories again. Short-term monthly payments (car, credit card minimum payments, medical, etc.) and long-term payments (mortgage, student loans, child support/ alimony).

Record those numbers here:

Total short-term debt monthly payments $__________
Total long-term debt monthly payments $__________

I ask you to consider the short-term debts, because they tend to be the easiest to eliminate, while simultaneously having a large impact on your budget. Even though your mortgage or student loan balance may be 10 to 100 times your credit card balance, the lower interest rates and longer repayment schedule make it relatively painless. Paying down $10,000 on a $250,000 mortgage is not going to change your monthly cash flow that much. Paying off $10,000 out of your $25,000 credit card balance, which is charging you 30% interest per year, will make a huge difference.