Final answer:
The debt coverage ratio (DCR) is a financial tool used by lenders to assess the borrower's ability to repay a loan based on their cash flow. It helps lenders evaluate the borrower's financial health and determine their likelihood of loan repayment.
Step-by-step explanation:
The debt coverage ratio (DCR) is a financial tool used by lenders to assess the borrower's ability to repay a loan. It measures the borrower's cash flow available to cover their debt obligations. A higher DCR indicates a lower level of risk for the lender, as it shows that the borrower has sufficient income to make their loan payments.
For example, let's say a borrower has a DCR of 2. This means that their cash flow is twice the amount of their debt payments, which gives the lender confidence that the borrower can repay the loan.
In summary, the DCR is significant for lenders as it helps them evaluate the borrower's financial health and determine their likelihood of loan repayment.