Outstanding debt is the total amount of money (including interest and fees) that is owed to a lender or creditor. Outstanding debt often continues accruing interest until it’s paid off.
If you’ve ever taken out a loan or used a credit card, you’re sure to have experienced outstanding debt. When you make all the required monthly payments on your loan or credit card, you’ll usually also notice that the total amount you pay back is more than the amount you received.
A clear understanding of outstanding debt is important for both companies and individuals. A company that manages its debt well can have more freedom to get other loans if it needs refinancing and a potentially healthier cash flow. That’s because the cash flow will be available for company use rather than paying off debts.
Outstanding debt arises when a lender gives a borrower an amount of money to be repaid in the future by the borrower, often with interest and fees. Either an individual borrower or business may hold outstanding debt.
The overall cost of debt includes interest on the debt charged by the lender and other fees. The interest rate (interest expressed as a percentage of debt) will vary based on your creditworthiness, the type of debt, the duration of debt repayment, and other factors. Applicable fees vary based on the lender, the type of debt, the agreement between a lender and borrower, and other factors.
Interest is part of the cost of debt, and it is separate from lender fees. Interest is an extra sum of money that you owe on your debt, added on to the amount you receive from a lender. Interest is typically charged as a rate. Therefore, the interest rate accrues as a set percentage of the amount you borrow over the period of debt. Some lenders may charge interest as a flat fee.
The interest rate is different from the annual percentage rate (APR). For most forms of debt, the APR measures the total cost of your debt (including the interest rate and applicable fees) if the debt would be outstanding for a year. Therefore, APR reflects the true cost of borrowing.
When lenders give you money in the form of debt, they usually charge various fees for processing and funding the loan. You’ll pay the lender fees when repaying your debt; therefore, such fees contribute to the total amount of your borrowing costs. The specific types of fees charged vary based on the type of debt, the lender, and other factors.
Some lender fees include:
Outstanding debt may come in two key forms:
Lenders generally choose to structure debt in these common ways, but there are other options as well.
Under the loan category, multiple options exist, including:
Your debt-to-income ratio is a key aspect lenders use to measure your ability to fulfill your monthly payment obligations for the money you plan to borrow. To calculate your debt-to-income ratio, divide all your monthly debt payments by your gross monthly income.
To get your monthly debt payments, add up all your monthly debt payments. Your gross monthly income is the money you earned before taking out taxes and other deductions.
For example, if you have a $1,500 monthly mortgage payment, a $100 monthly auto loan payment, and $400 worth of payments for the rest of your debts, your total monthly debt payment is $2,000 ($1,500 + $100 + $400 = $2,000). If your monthly income before taxes and deductions is $6,000, then your debt-to-income ratio is 33% ($2,000 ÷ $6,000) x 100% = 33%).
Many lenders prefer a debt-to-income ratio below 36%.
Your debt impacts 30% of a FICO Score. Having debt doesn’t necessarily mean that you’re a high-risk borrower or that you’ll have a low credit score. However, using a high percentage of your available credit can indicate that you’re overextended and likely to delay or miss payments. This may negatively affect your credit score.
Therefore, maintaining a reasonable amount of debt that you can comfortably pay may help you keep a good credit score. In turn, a good credit score increases the likelihood of getting approval on your loan applications.
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