Things To Know About Loans
If you’re unsure about how debt ratio, co-signing, credit scores etc. affect loans, this quick overview can help answer some of those questions.
How Can Co-signing Affect Me?
• Co-signing is the same as you personally borrowing the money.
• A loan you have co-signed on shows as money borrowed on your credit report and can tie up your credit for years, which may reduce your ability to borrow for yourself.
• If the person you have co-signed with fails to pay their loan, you are responsible for the entire balance and may have to pay any late fees or collection costs associated with it.
• In Utah, a creditor can collect the entire balance due from the co-signer without trying to collect from the primary borrower first.
• If the primary borrower were to die or become incapacitated, you would become fully responsible for the loan payment.
Be sure you understand and are ready for any of these possibilities before you sign.
How Do Credit Scores And Interest Rates Work?
Credit Score Use
Your credit score is what lenders use to determine the interest rate you would pay on the money you borrow.
What is an interest rate?
An interest rate is how much it costs to borrow money.
How can the interest rate affect what you pay?
The two examples below show the difference an interest rate can make in the final amount you pay on a loan. Each scenario reflects a loan that is paid on time, with no loan holidays or skipped payments.
Example 1
| If you borrow: | With a term of: | With an interest rate of: | Total interest you would pay: |
| $1,000.00 | 1 Year | 3.00% | $16.35 |
| $10,000.00 | 5 Years | 3.00% | $781.73 |
Example 2
| If you borrow: | With a term of: | With an interest rate of: | Total interest you would pay: |
| $1,000.00 | 1 Year | 16.00% | $88.84 |
| $10,000.00 | 5 Years | 16.00% | $4,594.18 |
What Is Debt Ratio?
Your debt ratio is the percentage of your expenses vs. your income. In other words: how many bills do you have compared to how much income you have each month (income can be payroll, social security, retirement, child support, etc.)
Your debt ratio is important because many financial institutions will not lend money if your debt is more than 50% of your income.
For example, if you are applying for a loan with the credit union we will look at your total monthly expenses, then add the amount of your new loan payment and compare that to your income.
Example
| Monthly Income | Monthly Expenses |
| Payroll | $2,500.00 | Rent | $350.00 |
| SSI | $400.00 | Utilities | $150.00 |
| Credit Card | $125.00 | ||
| Car Payment | $380.00 | ||
| Total Income | $2,900.00 | Total Expenses | $1,005.00 |
| New loan amount requested | $300/month |
Debt Ratio Calculation Is:
| Expenses | $1,005.00 |
| + New loan payment | $300.00 |
| = Total debt | $1,305.00 |
| Divided by total income | $2,900.00 |
| Debt Ratio = | 45.00% |
