Most often when I meet with people the first question I am asked is “what will my interest rate be” and the second is and most importantly ”what will my payment be?”
To answer their initial question: Interest rate is a determination of risk made by the lender. That risk assessment is based on the following factors: an applicant(s)’ capacity to pay, their credit history and last but not least the applicant(s)’ residence and employment stability.
In an effort to determine an applicant(s)’ capacity to pay the lender will calculate a customer(s)’ current debt service ratio. Debt service ratio is a calculation of the total amount of the applicant(s)’ monthly obligations divided by the applicant(s)’ total monthly gross income.
Lenders traditionally set the benchmark for maximum debt service at 40%.
*When the debt service exceeds 40% the lender may increase the interest rate on the loan as a result of the increased credit risk of the loan.
Below is an example of how debt service is calculated.
|Applicant||Source||Gross Amount (before tax/deductions)|
|Total Combined Income||3200|
|Line Of Credit|
|Line Of Credit|
|RBC Visa||Credit Card||85|
|Total Monthly Obligations||divided by||Total Monthly Gross Income||equals||Total Gross Debt Service|
In this example the customer has shown that he/she has the capacity to take on the car payment of $512.00. The debt service ratio is 37% (below the 40% threshold).
The first hurdle is now cleared (*the lender may request paystubs to verify the applicant’s income).
The lender will now move forward and review the applicant’s residence and employment stability and credit history in order to make an approval decision on the application.
Call or visit us today!!
We are here to help.
Crown Credit Solutions
Crown Automotive Group
1700 Waverley St.
Direct (204) 275-4438
Cell (204) 791-0813
Fax (204) 275-7669
Toll Free 1 (877) 346-8082