A person or family's debt to equity ratio is a summary of how much they owe versus how much they're worth.
Banks often use your personal debt-to-equity as a component of deciding whether or not to lend you money (this is what they use the reams of documents requested from you for). For example, the amount you owe on your house is $180,000 and your car loan outstanding is $7,000 (making total debt $187,000).
Your equity in the home and all of your other assets and belongings total $400,000. Personal debt to equity would be (187000 / 400000) = 0.468.
Debt to equity ratio is also called debt to net worth ratio.
Understanding Your Debt-to-Income Ratio
Your Debt-to-Income Ratio is a crucial personal financial health indicator. There is a difference between debt-to-euity-ratio and debt-to-income-ratio so don't get them confused.
Debt-to-income ratio is the percentage of your income you use to pay your debts. Most banks and financial professionals agree that you should keep your debt-to-income ratio at less than 36 percent of your gross income. If you want to get a picture of how your situation measures up, there's a simple way to figure it out. Take your monthly gross income, let's say two thousand dollars a month, and multiply it by 36 percent:
Calculating your debt-to-equity-ratio is really straightforward: Total up your outstanding loans, and divide the sum by your net worth (see how to calculate your net worth). For example, if your outstanding loans sum up to $500k and your net worth is $1 million, your Debt-to-Net Worth ratio would be 50%.
Not only is the net worth calculation useful, but your debt to income ratio can come in very handy. In fact, it’s even used by many lenders to determine whether or not to extend financing if you’re requesting a loan. If you have a head start and already know what your debt to income ratio is, you’ll be better prepared to find the loan that’s right for you.
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