Do you know what signfication the terms "debt capacity"? And how to make best use of your debt capacity? How is it your banker to calculate? That's a question I was asked Arnaud, a faithful reader Richest by mail. Arnaud thank you for this question. Here, I think, 3 rules to follow to make best use of your borrowing capacity.
What is your "debt capacity" and how it calculated? Basically your debt capacity is the maximum amount that you could still borrow from your banker. Roughly speaking, the higher your debt capacity, the higher you are a good client for your banker. Your borrowing capacity varies depending on several criteria. The amount of your income, obviously, and the credits you have currently, of course.
type your credit also has its influence. If you credit for your main house, your debt capacity will not the same as if you have a credit on a home that you rent. Your second loan is covered in part or in whole by the return of money it generates. This credit is less risky than your primary residence. In addition, if you showed your banker with your rental investments that you are a good manager, he will be more inclined to trust you for new credit.
Your credit history also plays in your favor if you still have your money back "on the nail." In summary, your borrowing capacity varies depending on many criteria and some think that we should always maximize the if necessary, for example by always having an outstanding loan that proves you're a good customer, even if you do not really need this credit. Personally, I have less credit, the better I feel.
How to best use your debt capacity?
To make best use of your borrowing capacity, you have at least three rules to follow:
1. Do take out a credit for objects whose value appreciates. When you buy a car, you know that you resell cheaper. You pay more money, adding the cost of your credit, an object that you resell cheaper (or do perhaps worth nothing at all). Financially, it is catastrophic! That's where your money hand you do not know what you did! The first rule is to take out a loan, and thus not pay more than face value for the items you resell more than you have purchased. This may be the case when you buy your principal residence or you build your business.
2. Prefer to take a credit rather than dip into your savings if the rate of return on your savings is higher than the credit. Specifically if your investments earn you 4.5% per year, you need money to finance a project and you can borrow at 3.5%, it is better to borrow than to dip into your savings. The final transaction amount you save 1%. Do not forget as long rule # 1!
3. Avoid getting a single credit in an amount that would be your borrowing capacity. Specifically, if you can borrow a maximum of 100,000 euros to buy your home, you should choose a home that you will not need that much. On the one hand you'll be less debt and pay off more quickly your bank, on the other hand, you keep borrowing capacity if required. Your banker will be able to authorize a new credit without requiring that you have repaid the previous before. It would be a shame to miss a good opportunity in the market because you lack the necessary funds.
By following these 3 rules, you should have the basic ability to properly use your endettment. What other rules would you add after your experience? Are you at your maximum borrowing capacity? For you, what is the percentage of the debt capacity that is good to keep a "reserve"?
Credit: paalia
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