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Knowing your debt to equity ratio, or as it is sometimes called a debt to resource ratio, is important. It is an important measurement tool for both businesses and individuals.
It is calculated or derived by dividing the entire amount of all your debt you by the total equity or assets that you own as a person or a business. For example, if you are carrying $150,000 in debt and had total assets or equity in the amount of $250,000, your debt to equity ratio would be 60%.
How to know if you're in trouble
If you do the math and find that you have a debt to equity ratio of more than 80 percent, this would definitely be a warning sign that you’re in a dangerous financial territory. Young couples often have a debt to equity ratios of more than 80 percent because they are buying their first home and probably with a minimum down payment. However as they continue to make their monthly mortgage payments, they gradually improve the amount of equity they have and lower their debt load. As a couple grows older, it should have more equity so that a good debt to equity ratio for an old couple should not be more than 50%.
Reducing your debt to equity ratio
If you find you have a debt to equity ratio of 100 percent, you need to do something about it. That is because that 100% is a sign that your financial troubles are much larger than your total assets. You will need to find ways to lower your debts while increasing your assets.
A good first step is to start monitoring your loan health to make sure your financial troubles don't become even worse. You might also think about pulling money out of your savings to pay off some of your debt.
A sign of good financial health
If you can lower your debt to equity ratio this is a sign that you're in good financial health. Banks and other lending companies are more likely to work with you when they see that you have a low debt to equity ratio. This shows that you can actually take out some additional debt. A minimal debt to equity ratio also means that you will have a good credit profile. You should be able to get lower interest rates on any new loans.
Easing your financial load
You may find it hard to accept the fact that you have a high percentage debt to asset ratio. However, it's really important to know your debt to asset ratio because if you don't know it, is very difficult to create a good budget–whether you're a family or a business. Also, if you have a high debt to equity ratio your bank or loan provider may not be too excited about providing a new loan. And even if you are able to get that loan, it will probably be at a higher interest rate.
One good way to improve that ratio
The easiest way to improve your debt to equity ratio is by reducing your debt. You cannot do this with a debt consolidation loan or with consumer credit counseling. Neither of these will actually reduce your debt. On the other hand, debt settlement can reduce your debt and get you a repayment plan that should be much easier to manage. Just make sure you choose an honest and ethical debt settlement company. These companies will not charge you anything up front and will collect their fees only when they have persuaded all your creditors to agree to settle your debt and you have approved the settlement plan.