If you want to know how healthy your debt level is, you can use financial ratios as a check-up. That’s what your bankers do before they decide on a loan request as the banks need to understand how strong you are financially.
If you are looking to buy a house, a car, or pursue further education, taking a loan from a bank is a common step. However, despite having good income and good debt payment records, banks may still reject your application or may choose to approve it with a higher interest rate. Why? One possibility is excessive debt. The bank assessment concluded that your future capability to service a new loan is doubtful. You already carry too much debt. Taking on another debt may just be the needle to prick the swollen bubble. What it means is…. your financial health is deteriorating, and the bank is not willing to take the risk.
But, how are banks so certain they know your financial future?
Banks use financial ratios as part of their stringent assessment process to determine a potential borrower capacity to repay a loan. If you failed to get a loan from banks, it is a strong indicator that your finances are not as healthy as you thought.
Getting turned down by banks won’t harm your credit score but the credit inquiry caused by the loan application, will. Know and monitor your financial health through financial ratios. So, before you apply for any loan, use these financial ratios to self assess your eligibility or chances of success. Also, the ratios can highlight any red flags or signs of excessive debt so you can take remedial actions soonest.