How Much Debt Is Too Much Debt?

In June 2019, US consumer debt stood at $4.1 billion.

Borrowing money isn’t bad in itself; without debt, the vast majority of us would never be able to buy our own home.

Debt can be a bad thing when it gets out of control, however. But how much debt is too much?

Read on as we help you to decide if your debt is getting out of hand.

Add Up All Your Debt

The first thing you need to do to work out if your debts are getting out of hand is to write down every debt that you have.

Make a list of all your sources of debt. These could include a mortgage, credit cards, car loans, students loans, store cards, and more.

This may be the first time you’ve actually made a tally of all your debt, and what you find may shock you. When we’re paying off multiple sources of debt, it’s easy to lose track of just how much we owe.

As well as your total debt, work out how much your total monthly repayments are.

Calculate Your Debt-to-Income Ratio

Now that you know exactly how much outstanding debt you have, you can calculate your debt-to-income ratio.

Simply divide your monthly debt repayments by your monthly earnings. Let’s say you earn $2,500 a month (roughly the median US earnings) but pay $1,000 a month to service all of your debt.

$1,000 divided by $2,500 comes to 0.4. Multiply by 100 to express this as a percentage and you get a debt-to-income ratio of 40%. This is not a good level at all.

Your debt-to-income ratio should be 15% or less for you to be able to cope comfortably with your debt. Anything above that is not sustainable in the long term, and if your ratio is over 40% then you need to take action straight away.

Do You Have Unsecured Debt?

The type of debt you have can also make a difference to how much you can comfortably afford.

Secured debts use your property as collateral, such as with a mortgage or an auto loan. Because you are putting up collateral, the risk for the lenders is less, so your interest rates will be lower.

Unsecured loans are a bigger risk and come with much higher interest rates. A smaller amount of unsecured debt can end up costing you much more than a larger amount of secured debt.

It’s important that you pay off the highest rate debts first. For example, payday loans from lenders such as Bonsai Finance are great for tiding you over until you get paid but can rack up large amounts of interest if you don’t pay them off on time

How Much Debt Is Too Much?

The question of how much debt is too much really depends on the individual. If you’re a high earner, you may be able to handle large amounts of debt, whereas for others just a few hundred dollars can have a serious negative impact.

The most important thing is to work out how much debt is too much for you and stay within your limits.

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