The capacity of indebtedness or credit capacity is the amount of maximum debt that a person or company can assume without having to have solvency problems. It is usually established as a percentage on income.
The capacity of indebtedness can be assigned to both natural and legal persons, that is, to ordinary individuals and organizations, companies or even countries. It is the amount considered as maximum possible by someone at the time of receiving a loan and pledging to return the same in full with some interests without jeopardizing your particular economic position.
The level of indebtedness capacity to be considered as standard is around 30-40% of the income for individuals. This means that it is never desirable to assume debts whose periodic payments represent more than that percentage of total income. In this way, a remaining 60-70% is guaranteed to comply with basic commitments and be able to carry out normal daily economic activity.
Another way to call this economic aspect is credit capacity , precisely because it reflects the adaptability of people or companies when it comes to undertake a specific loan or receive a credit without having to put their assets in particular danger or your present and future income.
The study and measurement of a certain level of indebtedness capacity responds to the need to know the most favorable conditions when making loans of very different types and attending to their subsequent and logical return to entities or individuals that act as lenders .
Therefore, this concept is generally evaluated by banks and other credit institutions as a step prior to the granting or denial of a line of credit or loan to individuals and individuals. Logically, the objective is to ensure full repayment plus interest as a model for achieving economic benefits by eliminating, as far as possible, the appearance of risks.
Factors that determine the indebtedness capacity
This credit capacity will depend on important variables:
- Economic solvency or capacity to generate income both in the present and in the future with a view to the repayment of the principal plus interest . Both the amount and stability of these revenues.
- Current assets and income available to the borrower.
- Other types of guarantees or guarantees by third parties, as well as the existence of alternative means of payment.