What is an Inflexible Expense
An inflexible expense is one that cannot be adjusted or eliminated by a company or individual.
Breaking down Inflexible Expense
An inflexible expense is a recurring required payment or debt. It likely is a fixed amount whose payment stream is unalterable. For an individual, a typical inflexible expense would be mortgage or car payments, alimony or child support, which have fixed repayment schedules by amount and date. For companies, interest payable and employee wages would be inflexible expenses. A flexible expense is one that is easily altered or avoided. Flexible expenses are costs that can be adjusted by amount or eliminated by the consumer. In personal finance, flexible expenses are costs that are easily changed, reduced or eliminated. For example, entertainment and clothing are flexible expenses. Even necessary expenses, such as groceries, can be considered flexible because the amount spent is adjustable by the consumer.
Expenses in Lending Criteria
Inflexible expenses are one of several criteria considered by lenders in granting personal loans, mortgages or auto loans. Personal loans are not secured by collateral, unlike a mortgage or car loan, so eligibility criteria are stricter. Lenders typically look at five criteria to evaluate personal loan applications: credit score; current income; employment history and equated monthly installment. A credit check shows an applicant’s credit score. Credit score can be improved paying off a portion of debt and increasing current card credit limits. Both improve the credit utilization ratio, which is the amount of debt divided credit limit, and can account for up to 30 percent of a credit score.
Lenders closely examine current sources of income and monthly expenses. Even if the applicant has strong earnings, lenders measure debt by evaluating the amount on credit cards as well as inflexible expenses. The debt-to-income ratio (DTI) equals total monthly debt payments divided by gross monthly income. For example, a borrower with $6,000 in monthly income and $2,000 in monthly debt payments has a DTI ratio of 33 percent. Lenders look for a DTI ratio of no more than 43 percent, which is the maximum mortgage lenders allow applicants to have. Lenders require established proof of ongoing income and employment stability. Self-employed applicants undergo closer scrutiny. Equated monthly installment (EMI) indicates the loan payment amount in order to pay off a mortgage or other loan on time. A borrower’s EMI amount depends on the interest rate and the length of the loan. Lenders also check credit history and loan repayment history. Unpaid debts can affect a credit score for up to seven years, which can reduce the score and limit loan eligibility.