Debt ratio

The term 'debt' is a broad term that colloquially refers to the debt incurred by a company or individual, as well as the framework, terms and conditions under which the debt was incurred - which is rarely irrelevant.

Why take on debt?

In Denmark, it is very common for both private individuals and companies to incur debt in the form of mortgages, overdrafts, operating credits, home loans, etc.

Debt is a form of financing that allows the borrower to purchase assets, goods or services without having to pay the full amount immediately. The debt is then settled over an agreed period of time.

In a business, there are basically two types of debt: long-term debt and short-term debt.

Current liabilities often consist of trade payables, VAT or overdrafts and are due within the next year.

Long-term liabilities are debts that fall due after a period of more than 12 months, such as mortgage loans.

Debt conditions in relation to credit rating and credit granting

If you run a business and need to provide credit or loans to a customer, the customer's other debts are very relevant to you.

The customer's debt ratio provides a picture of their finances and funding. By comparing the customer's income with their debt ratio, you can get an indication of whether the customer is able to pay their obligations.

You can then use information about the customer's debt situation to assess whether you want to grant credit or a loan - and if so, how much.

However, it can be difficult to gain insight into private individuals' debts.

Good and bad debt conditions

Debt often has a negative connotation for most people - less debt is often considered better than a lot of debt. But is this always the case?

High debt levels are generally not a problem as long as the borrower is able to pay the costs of the debt when they are due.

The discussion about what constitutes good and bad debt can be complex. Generally speaking, the more secure a loan is - such as a house loan or mortgage - the better the debt ratio. Consumer loans that extend over a longer period of time, on the other hand, are often considered less good debt conditions.

What does it cost to borrow money?

Basically, the lender sets the price of a loan, but this can be influenced by a number of factors such as the world situation, national bank interest rates, underlying bonds and much more.

The cost of borrowing money is reflected in the interest rate and APR (Annual Percentage Rate).