The debt capacity is the maximum amount of debt that an individual or company can assume without having solvency problems. It is usually established as a percentage of income.
In other words, the borrowing capacity can be assigned to both natural and legal persons, or even countries. Thus, it is defined as the ‘ceiling’ of credits that a borrower is able to acquire without putting his economic position at risk by returning them.
The borrowing capacity considered as standard is between 30% and 40% of income. This means that ideally the sum of the monthly payments of the debts should not be greater than 1/3 of the individual’s remuneration.
If the previous rule is fulfilled, it is guaranteed that between 60% and 70% of the user’s income will be used to fulfill basic commitments and to carry out daily economic activity normally.
Another way of calling this economic term is credit capacity, precisely because it reflects the financing limit that an economic agent could receive.
It should be noted that, by measuring their debt capacity, the person can determine if they have sufficient resources to assume a new debt, for example.
Likewise, banks evaluate this concept as a prior step to granting or denying a line of credit. The objective is to ensure full recovery of the amount borrowed plus interest.
In other words, the credit institution studies its potential clients to reduce the risk of default in the future. In this way, the company generates profits.
Factors that determine the debt capacity
This credit capacity will depend on important variables:
- Financial solvency or ability to generate income both in the present and in the future, with a view to repaying the principal of the loan plus interest.
- Current assets and income available to the borrower.
- Endorsements or guarantees from third parties, as well as the existence of other alternative means of payment.