- Debt to equity is the amount of money a borrower owes on a mortgaged property compared to the amount he actually owns, or his equity. This is typically expressed as a percentage or ratio. In business, the debt-to-equity ratio helps measure a company's solvency by comparing its outstanding debt to its assets.
- A simple formula can determine an individual or company's debt-to-equity ratio. In the case of a mortgage applicant who is making a down payment of $20,000 and is borrowing $100,000, the amount of debt is divided by the amount of the down payment, resulting in a ratio of 5:1 or 20 percent.
- A debt-to-equity ratio is often one factor that is used to determine whether a potential borrower is eligible for a loan. In general, the lower the debt in comparison to equity, the more creditworthy the applicant is likely to be.
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