2. Debt safety ratio How much credit can you stand? Aa Aa To maintain financial

Question

2. Debt safety ratio How much credit can you stand? Aa Aa To maintain financial stability, people should know how much credit they can comfortably tolerate. The debt safety ratio is a computation that defines one's monthly loan repayment burden. It compares loan obligations to income The formula for the debt safety ratio is Debt Safety Ratio - Debt Safety Ratio Beth wants to determine her current debt safety ratio. Her monthly take-home pay is $4,000. She compiled the following monthly loan payment information Type of Loan Payment Auto Student Credit cards House mortgage Amount $420 60 120 1,400 $ 2,000 Total The total monthly loan payments figure Beth will use when computing her debt safety ratio is $ and include her house mortgage Beth's debt safety ratio is 90 and considered

Explanation / Answer

Debt Safety Ratio = It is the ratio of monthly consumer debt payments to the monthly take-home pay, expressed as a percentage. The debt safety ratio should be around 15 percent and not exceed 20 percent.

Total monthly loan payment = 420+60+120 = $600

Including house mortgage = $2000

Berths Debt safety ratio = 600/4000 ie 15% and is considered appropriate and in the safe zone

If the ratio changes to 20% then, take home pay must be $3000 (600/20%) or monthly payment should be $800 (4000*20%)

If the ratio remains in the safe zone the lenders will be willing to give Berth a higher loan

Periodically it is useful for - Option 2 and 4

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