Forums: Discussions for entrepreneurs and small business.

I'm starting a lending business, and need to understand the concept of Debt/Income

ratios. Now I know there are many calculatiors out there. Not looking for that. What

I'm trying to figure out is how much I can loan a client if:

the rate is 5.25% a MONTH (APR? ) for 8 months, and the client has a d/i ratio of 46%

Thanks for any help

- Nathan

Hi Southern_Lenders

THe use of D/I ratios is a rule of Thumb to determine whether the Borrower can reasonably repay the Debt. Your example  lacks a lot of information but lending for 8 months would appear to be an unusual term unless it a construction loan to be replaced by a permanent loan or some other bridge financing. In general, lending at a 5.25 rate with a D/I ratio of 46% appears to be quite risky unless there is very strong liquid collateral.

Mike Janicki

These would be short term loans in nature, hence the high interest rate, spanning from 4, 6, 8 and 12 months....think of it as a cash advance for a small business or person where the rates are typically higher and the term is rather short

what information am i lacking, there would be no credit checks here as to make the process faster and easier for the client...yes i know this is higher risk for me, again thats why the term is small and rates high.

Thanks

Hi Southern_lenders

Lending without a level of due diligence is a recipe for disaster.  I understand that you want to create a rapid response lending model however you need to develop a due diligence package that has key elements to access the likelihood of repayment. Ahigh interest rate alone will not assure repayment.

Mike Janicki