What Is Recurring Debt?

Recurring debt is any payment used to service debt obligations that occur on a continuing basis. Recurring debt involves payments that cannot be easily canceled at the payer's request, including alimony, child support, and loan payments.

Understanding Recurring Debt

Debt, simply, is a sum of money that is owed to somebody else. Sometimes debt is incurred without choice as part of a court order. On other occasions, it may be taken on voluntarily, giving individuals or companies the opportunity to borrow capital to purchase something they might not otherwise be able to afford under the condition that the sum loaned out is returned to the lender in full at a later date, usually with 澳洲幸运5官方开奖结果体彩网:interest.

澳洲幸运5官方开奖结果体彩网:Financial obligations are labeled as recurring if they must be paid at fixed, regular intervals and cannot easily be terminated. Mortgage and car payments, child support, student loans, and minimum✱ credit card payments all fall under this category.

Notable exceptions include bills that can be easily canceled, such as subscriptions. 澳洲幸运5官方开奖结果体彩网:Credit card balances, too, are not counted as part o𓃲f a consumer's monthly debt if the balance is paid in full every month. 

Lenders consider spousal support (alimony) and child support as long-term debt obligations when calculating eligibility for a loan. Lower monthly debt levels will generally improve an individual's 澳洲幸运5官方开奖结果体彩网:credit score, allowing them to obtain low༺er interest rates, or borrowing costs, on lines of credit.

Impact of Recurring Debt 

An individual's recurring debt is a strong factor when applying for a loan such as a mortgage. Used in the 澳洲幸运5官方开奖结果体彩网:debt-to-income (DTI) ratio, lenders compare a borrower's income to the current amount of debt service payments. The DTI ratio is calculated by first adding up all monthly debt obligations, or recurring debt, such as car loans, 澳洲幸运5官方开奖结果体彩网:student loans, minimum monthly payments on any credit card debt, and any other loan payments. The total is then divided by pretax or 澳洲幸运5官方开奖结果体彩网:gross income and expressed as a percentage.

The concept behind this practice is to determine whether enough income remains, after accounting 🐎for recurring debts, for the borrower to comfortably fund monthly mortgage payments.

Types of Debt-to-Income (DTI) Ratios

Lenders tend to look at two different DTI ratios. The 澳洲幸运5官方开奖结果体彩网:front-end ratio, also known as a household ratio, is the total amount of home-related expenses — the proposed monthly mortgage, 澳洲幸运5官方开奖结果体彩网:property tax, insurance, and homeowners association fees — divided by monthly gross income. Lenders generally prefer this ratio to be 28 percent or lower. 

In contrast, the 澳洲幸运5官方开奖结果体彩网:back-end ratio includes all debts paid each month, such as credit cards, student loans, personal loans, and car loans, along with the proposed 澳洲幸运5官方开奖结果体彩网:household expenses. Back-end ratios ar👍e usually slightly higher, typically 36 percent or lower, since they take into account all monthly debt obligations.

Special Considerations

Having recurring debt, believe it or not, can help to improve an individual’s credit score. Those with existing or ♛previous 🍸financial obligations might secure cheaper borrowing rates because they already have a track record of managing and paying off what they owe.

The amount of recurring debt must be reasonable, though. Taking on too many recurring payments at once increases the risk of 澳洲幸运5官方开奖结果体彩网:defaulting on obligations. Missing payments has an adverse effect on credit scores and can lead to assets being repossessed, or in the case of child support payments, potꦏential jail time.