What Is Debt Load?

Debt loads can ruin a person’s life in a few short months if one isn’t careful about their finances. Understand what debt load is, and how it can impact your credit rating and your potential borrowing ability.

Debt load simply means the amount of debt that a person is carrying when weighed against the amount of money they have coming in. This does not just mean with one particular financial institution, but across the board. Debt load is important because it is a crucial deciding factor when lenders are considering whether or not they will let you have the money you have requested.

Why your debt load is important for lenders:

Your credit rating is determined by many contributory factors, and different lenders will make different risk-assessment calculations based on what they see in your credit history, the amount you have applied for, and how risk-averse they are. However, all lenders will want to look at your existing debt-to-income ratio, which is just another term for your debt load.

Your debt-to-income ratio is important because it allows the lender to assess whether the debt you are currently carrying is at a “safe” level. In other words, how much more could you reasonably borrow before it became difficult for you to meet your repayments? If someone has an income of $2,000 a month and monthly debts of $1,500 a month, that would not be considered very safe because that only leaves $500 to cover everything else. Your debt-to-income ratio in this case would be at 75%, but lenders are aware that the debt load you have on paper is not the only financial drain on your monthly income. You will also have utility bills, taxes, food, clothing, and any amount of extraneous fees; plus you may also be subject to those out-of-the-blue bills that occur every so often, such as a bill for car repairs or replacement of a domestic appliance.

All of these extra debits must come from the gap between your debt load and your income, which in the above example would be $500. That is why lenders will want to know how many dependents you have, because they know that this will raise your food bills, and will involve such things as sundry school expenses.

It is important that you work out your debt load before making any applications for credit cards or other loans, because although you may be coping well financially and have no history of debt defaults, your current debt load may actually cause your application to be turned down. Bear in mind that refused applications for credit will lower your credit rating. Even if you are not looking to borrow any more money, a debt load calculation is a useful one to make for your own peace of mind because it will alert you to how close you may be to experiencing difficulties.

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