|
Many consumers carry a variety of credit
obligations on the credit report. These obligations can be home
mortgage, auto loan, credit cards, time-share, student loans,
unsecured loans, and installment loans.
Monthly payments on the credit obligation have
a direct relation to consumer’s income. It is likely that the ratio
of total payments is quite high compared to income. High
income/expense (Debt to Income) ratio will live less disposable
income and an individual may even feel cash flow crunch.
Example: Lets take a hypothetical
example of Mr. X's income, expense and credit obligations. Following
is the summary of Mr. X's financial scenario:
|
Credit Obligation |
Balance |
Interest Rate |
Monthly Payment |
|
Home Mortgage |
280,000 |
6% - 30 Yrs Fixed |
1,678.74 |
|
Auto Loan |
15,000 |
5% - 60 months |
283.00 |
|
Credit Cards |
10,000 |
18% |
300.00 |
|
Student Loans |
20,000 |
4.5% - 10 Years |
240.00 |
|
Unsecured Personal Loan |
10,000 |
16% |
300.00 |
|
Time Share |
18,000 |
- |
350.00 |
|
Shopping Store Credit Card |
5,000 |
22% |
150.00 |
|
Total |
358,000 |
|
3,301.74 |
Lets say Mr. X has decided to consolidate his
debts of $ 78,000 by taking a new loan of $ 85,000 with 15 year term
and interest rate of 8.5%. His monthly payments will be $837.03.
His total monthly payments are now $ 1,678.74 (existing mortgage payment) +
$837.03 (new loan payment) = $ 2,515.77.
Mr. X has now reduced his monthly
payments from $ 3,301.74 to $ 2,515.77. His monthly savings are $
785.97 per month and $ 9,431.64 per year.
Note:
The above examples are given for
illustrative purposes only and are based on hypothetical situation.
Actual monthly payments, closing costs and APRs may vary. |
