Debt ratio is a measurement of how much money a person or business spends each month or year on repaying debts compared to income. A high debt ratio can put a business or individual at risk for a serious financial crisis, including bankruptcy or property foreclosure. The two basic ways to lower debt ratio proportions are to increase income or decrease expenses, but there are several good ways to help lower debt ratio over a period of time.
One of the first steps in lowering debt ratio is to perform a risk assessment. For instance, a person may have a high debt ratio because he or she is actively lowering debt through aggressive, high payments on debt. This is generally a safe strategy and can help eliminate debt sources quickly, even though the ratio can technically appear to be high. If a person has a high debt ratio and is only paying minimum payments, however, risk of financial crisis may be greatly increased.
Sometimes, people will be able to consolidate debts into lower-interest loans with a longer repayment term. Not only can this strategy help reduce the added expense brought by high interest rates, it can cut minimum payments, allowing some people to make repay the principal debt faster. Consolidation is often available to people with multiple credit cards, but car loans, house loans, and private loans can also sometimes qualify for this type of debt management.
A high debt ratio is often a sign that expenses need to be cut. If a person is paying more than half of his or her income in debts, it may be wise to do a budget analysis and determine where cuts can be made. Simple changes, such as giving up cable, reducing restaurant trips, and using public transportation, can help save funds to put toward debt. Over time, giving up a $4 US dollar (USD) mocha habit can make a significant impact in debt levels. In more serious financial situations, major changes, such as renting a less expensive apartment or giving up a leased car, may be necessary.
If possible, finding a new source of income is another way to help reduce a high debt ratio. This may require a change of career if wages are below the market level, or taking on an additional part-time job to add extra funds. Some people can reduce their high debt ratios by finding unusual sources of income, such as building websites that generate income through advertising, or even by holding a garage sale. Giving income an occasional boost through extra work can do a lot to reduce debt ratio, so long as the extra earnings go toward paying down debts.