The amount of debt you can consider “reasonable” will vary widely depending on a number of factors about your financial situation and the type of debt you have. Youll need to consider how you are using the debt and how you are able to pay it off, as well as the debts impact on your overall credit.
Learn how to determine how much debt is too much and how much debt may be considered reasonable. Then, you can better analyze your own financial situation.
Personal debt is a common part of modern life. With credit cards, mortgages, student loans, and car loans, most people carry some amount of debt But how much debt is too much? At what point does your debt load become excessive or unmanageable? This article will explore what’s considered a high debt burden and provide tips on assessing and managing your debt
How Much Debt Is Too Much?
There’s no single threshold for determining when debt becomes excessive. A debt load that stretches one person’s budget to the limit may be easily managed by someone else. Still, there are some general guidelines that can help you evaluate if your debt is reaching problematic levels:
-
Debt-to-Income Ratio Your debt-to-income ratio compares your monthly debt payments to your monthly gross income. Generally a ratio above 36% is considered high while a ratio over 50% indicates a severe debt burden.
-
The 28/36 Rule: This guideline states that your housing costs should not exceed 28% of your gross monthly income, while your total debt payments (including housing) should not top 36%.
-
High Interest Costs If you’re paying out large portions of your income on interest charges alone it’s a red flag that your debt may be unmanageable.
-
Missed Payments: If you cannot consistently make minimum payments on your debts, it clearly signals your debt load is too high.
-
Using Debt to Pay Debt: When you need to rely on credit cards or loans to pay existing debts, it indicates your debt is out of control.
Warning Signs Your Debt Is Too High
In addition to the numerical benchmarks above, watch for these warning signs that your debt may be reaching excessive levels:
-
You struggle to pay monthly bills and debt payments.
-
Your balances continue growing despite making payments.
-
You’re only paying the minimum due on debts each month.
-
You’re juggling multiple debts with no plan for paying them off.
-
You use credit cards for necessities because you lack cash.
-
Debt prevents you from saving or investing money.
-
You feel stressed, depressed, or anxious about your finances.
How Much Debt Is Normal at Different Life Stages?
What’s considered manageable debt can vary depending on your age and life circumstances. Here are some guidelines for reasonable debt loads at different stages:
-
In your 20s: Up to 36% DTI. Mostly student loans and credit card debt.
-
In your 30s: Up to 38% DTI. Mortgages, car loans, and student loans.
-
In your 40s: Up to 36% DTI. Mortgages, car loans, and credit card debt.
-
In your 50s: Up to 36% DTI. Mostly mortgages and credit card debt.
-
In your 60s: Debt declining. Mostly mortgages and credit card debt.
Of course, these are not hard-and-fast rules, just benchmarks to help assess if your debt is in line with your life stage. Regardless of age, a debt-to-income ratio approaching 50% is a sign that debt reduction needs to become a priority.
Strategies For Managing High Debt
If you determine your current debt load is too high, here are some strategies to get it under control:
-
Make a budget: Track your income and expenses so you can target areas to cut costs and free up money for debt repayment.
-
Pay more than the minimum: If possible, pay well above the minimum payment to slash debt faster.
-
Prioritize high-interest debt: Focus any extra payments on credit cards and debts with rates above 10%.
-
Consolidate debts: Consider consolidating multiple debts through a lower-interest balance transfer card or debt consolidation loan.
-
Consider debt management: Non-profit credit counseling agencies can help negotiate reduced interest rates and develop a repayment plan.
-
Look into debt relief: Options like debt settlement or bankruptcy may be necessary if your debt is truly unmanageable.
-
Boost income: Take on a side gig to bring in extra cash that can be applied to knock out debt.
The Bottom Line
There’s no definitive threshold for how much debt is too much, as it depends on your individual circumstances. But utilizing benchmarks like the debt-to-income ratio, watching for warning signs, and comparing your debt to your life stage can help you determine if your debt load is becoming excessive. If so, promptly taking steps to reduce debts can help regain financial control and stability.
:max_bytes(150000):strip_icc()/Long-TermDebt-FINAL-78bb33e797684e6d85085b02a68ed204.png)
Using the 28/36 Rule
A common rule-of-thumb to calculate a reasonable debt load is the 28/36 rule. According to this rule, households should spend no more than 28% of their gross income on home-related expenses, including mortgage payments, homeowners insurance, and property taxes. At the same time, they should spend no more than 36% on housing expenses plus all other debts, such as car loans and credit cards.
So, if you earn $50,000 per year and follow the 28/36 rule, your housing expenses should not exceed $14,000 annually, or about $1,167 per month, and your housing expenses plus other debt service should not exceed $18,000. That means your non-housing debts should cost you no more than $4,000 annually, or $333 per month.
Further assuming that you can get a 30-year fixed-rate mortgage at an interest rate of 4% and that your monthly mortgage payments are a maximum of $900 (leaving $267, or $1,167 less $900, monthly toward insurance, property taxes, and other housing expenses), the maximum mortgage debt you can take on is about $188,500.
If you are in the fortunate position of having no credit card debt and no other liabilities and are also thinking about buying a new car to get around town, you can take on a car loan of about $17,500 (assuming an interest rate of 5% on the car loan, repayable over five years).
To summarize, at an income level of $50,000 annually, or $4,167 per month, a reasonable amount of debt would be anything below the maximum threshold of $188,500 in mortgage debt and an additional $17,500 in other personal debt (a car loan, in this instance).
Note that this example is based on early 2020s interest rates, which were at near-historic lows. Higher interest rates on mortgage debt and personal loans would reduce the amount of debt that can be serviced since interest costs would eat up a larger chunk of your available income.
The Good Side of Debt
Debt can allow you to purchase useful assets that would otherwise be too costly. Taking on a mortgage to buy a home, for example, not only provides a family with a place to live but can, in the long term, prove to be a worthwhile investment.
This is not to say that you should constantly be taking on debt. A moderate amount of debt that helps your overall situation and is within your means to pay down may be considered a reasonable amount of debt.
Generally, what is considered a reasonable amount of debt depends on a variety of factors, such as what stage of life you are in, your spending and saving habits, the stability of your job, your career prospects, your financial obligations, and so on.
The interest rates that youre paying on your debt are another important factor in determining whether a debt is reasonable. A relatively low interest rate, such as those found on mortgages, makes debt manageable. On the other hand, high-interest rates, such as those on payday loans and some credit cards, can lead to debt levels spiraling out of control.
If you have an unmanageable amount of debt, you may want to consider using a debt relief company, which can help you negotiate with creditors to pay a lower amount. These companies work with unsecured debt in which you are significantly behind in payments.
What is Considered Bad Debt? | Phil Town
FAQ
How much debt is considered a lot?
Is a debt ratio of 1 bad?
If the ratio is equal to 1, it means that your company is financed equally by creditors such as banks or suppliers. If the result is less than 1, the percentage indicates that your company has less debt than equity financing. This means that most of the financial risk falls on the owners.
Is $100,000 in student debt a lot?
A lot of student loan debt is more than you can afford to repay after graduation. For many, this means having more than $70,000 – $100,000 in total student debt.
Is $20,000 a lot of debt?
If you’re carrying a significant balance, like $20,000 in credit card debt, a rate like that could have even more of a detrimental impact on your finances. The longer the balance goes unpaid, the more the interest charges compound, turning what could have been a manageable debt into a hefty financial burden.
Is 36% a good debt-to-income ratio?
Generally, 36% is considered a good debt-to-income ratio and a manageable level of debt, as no more than 36% of your gross monthly income goes toward debt payments. If your DTI ratio is higher, it may be too much debt to handle. Though it is a diverse country, Americans have one big thing in common: They carry a staggering amount of debt.
What is a good debt-to-income ratio?
A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt. Now that we’ve defined debt-to-income ratio, let’s figure out what yours means. Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high.
How much debt should you pay a month?
For example, assuming you make a gross monthly income of $3,000, your credit cards, auto loan, and other non-mortgage debt payments shouldn’t exceed $450 a month when combined. Other warning signs of debt problems may include: Not remembering how much you owe and to who off the top of your head. Borrowing money to make payments on other debts.
What does a high debt-to-income ratio mean?
Your debt-to-income ratio measures the amount of debt you have against your income. If you have a debt-to-income ratio near or more than 40%, this is a sign that you may have a debt problem. It’s important to keep an open credit line for emergencies.
How do I know if I have a high debt-to-income ratio?
Looking into your debt-to-income ratio can help answer your question. Add up your monthly debt obligations (things like auto loans, housing payments and credit card bills) and divide it by your monthly gross income. Debt loads in excess of 36% DTI can be difficult to pay off and can make accessing credit more challenging.
What does a 28% debt-to-income ratio mean?
This is referred to as your front-end DTI ratio. A 28% mortgage debt-to-income ratio would mean the rest of your monthly debt obligations would need to be 8% or less to remain in the “good” category. How could you lower your debt-to-income ratio?