One of the most important factors in determining whether or not a consumer qualifies for a particular loan is the individual's debt ratio. The debt ratio is essentially a way to determine how much of an individual's monthly income is spoken for every month in the form of payments that are due. The higher the percentage of monthly income allocated to debt, the higher risk the loan becomes to a bank.

Case in point: For someone who earns $5000 every thirty days, and has a car payment of $450 per month, education loans demanding $120 per month, as well as a credit card (minimum) payment of $200 per month. The debt ratio is figured out by totalling the monthly payments, and dividing them into the amount of money coming each month ($5000). To sum it all up, the ratio of debt for this person is 15.4%.

For a corporation, the debt ratio is defined as the amount of debt a company has on the books relative to its assets. If a company accepted a loan from a bank of $1 million and the company has $2 million in assets on their balance sheet, the company's debt ratio is 50% ($1 million divided into $2 million). A debt ratio of great than 1 (or 100%) would indicate that a company has borrowed more money than they have assets to show for it. For a company, the debt ratio will show investors and creditors just how much the company relies on debt to finance its assets.

Here is why this information is important to you, and important to creditors.

The answer is simple: whether you're a company looking for more money to help your business take off you're going to want additional funds at some point. For a lender to want to closely look at your fiscal situation is a smart move on the lenders part.

A lender who makes home loans for example, may establish a rule that they will not issue a mortgage loan that would cause an individual's debt ratio to exceed 38%. When the lender is deciding how large a loan an applicant qualifies for, they examine all outstanding debt and determine the maximum monthly payment that individual can handle without exceeding their 38% maximum debt ratio. Consumers with a high debt ratio often have a hard time getting a loan.

Debt ratio is crucial, so take yours seriously. Regardless of how much income you earn, you want to keep your ratio as "in the green" as possible. Lenders want to be absolutely sure that you can and will be able to make your payments on time.

One way to insure your debt to income ratio is in a good position is to consider using a debt settlement company to settle your debts for pennies on the dollar. Long term this will not hurt your credit and it will significantly lower your debt ratio..