When you look back on what you have been able to accomplish in your life, chances are that it was all possible due to debt.
Without a loan, you wouldn’t have owned your first home.
Without a loan, you wouldn’t have driven that first car of yours.
And without a loan, you couldn’t have earned that first degree.
In other words, debt can truly be a good thing. However, according to the old adage, you can have too much of a good thing. If you feel that you have piled up too many loans, there are tips to help you pay off your debt in a smart and efficient way.
So, how much debt is too much? Here is a rundown on how you can determine your maximum debt limit. Let’s get started!
How Much Debt Is Too Much?
A good way to determine how much debt is too much in your situation is to look at your ratio of debt to income.
To get this figure, you should divide your recurring debt each month by your gross income each month. You will then express this figure as a percentage.
Your monthly debt includes anything that you have to pay each month. This includes, for example, your mortgage, credit cards, car payment, and student loan.
Meanwhile, your gross income is the amount of money you bring home prior to paying taxes, Social Security, and insurance.
Example of Debt-to-Income Ratio Calculation
If you have $3,000 in current debt and generate a gross income of $6,000 per month, your debt-to-income ratio comes out to 50%. Unfortunately, this is not a good figure.
Many lenders generally like to see ratios of around 36% maximum. In fact, some financial advisors state that ratios of more than 20% are indicators that consumers are borrowing too much. Still, others say that near 30% is the magic number.
What does this tell us? It tells us that there’s no black-and-white answer for how much debt is too much for you. However, if you find that your disposable income each month seems insufficient, you’re probably carrying more debt than you should.
How to Help Yourself
If you’re wondering whether to get that next loan, ask this question to yourself first. “How much debt is too much?”
There are many different reasons to get a loan. Irrespective of the circumstance, you must eventually pay back the borrowed money. Therefore, it is always advisable to not borrow more than you need and your repayment ability.
When you start feeling the burden of too much debt, consolidating all of them into one can help you simplify your finances. In some cases, you may even be able to reduce the monthly payments.
The next time you decide to get a loan, determine your requirement, check about your ongoing debt payments and figure out how much you need. There are lenders who also help you to determine the ideal loan amount and then design a suitable repayment term for you.
Always find the right fit lender and loan fit for your financial situation.
Image source: Institute for Money and Technology.
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