Is your debt to income ratio too high?
How much of your income is used up paying monthly debt payments? Our debt to income ratio calculator the percentage of your monthly debt payments to your gross monthly income. This is a popular ratio used when qualifying for a loan but it’s also very important to you to know just how affordable your debt is.
Most lenders suggest your debt-to-income ratio should not surpass 43%. We think a ratio of 30% or less is what you need to be financially healthy and anything above 43% is cause for concern. If you are facing a ratio of 50% or more, you should consider talking to a debt expert about your debt relief options.
1. Calculate Your Income
2. Calculate Your Debt Payments
30% or less: Good. You are probably OK. Debt repayment is not consuming a significant amount of your monthly pay, leaving you room to increase your payments enough to pay off your debts on your own. Build your budget, create a repayment plan, stick with that plan and you will likely find yourself in much better shape within a year.
31-42%: Manageable. While you may be able to manage with a debt repayment ratio this high, you are at the maximum range of acceptable. If a significant number of your debts have variable rate interest (like lines of credit) start working to reduce your debt now as rising interest rates will mean more of your paycheque will be going towards debt repayment in the future. If you are only making minimum payments, next month keep your payments the same. Having a higher, fixed, monthly payment, will help you get out of debt sooner.
43-49%: Cause for Concern. Any variation in income or interest can put you in the danger zone. If you only included minimum payments, you may not have enough room in your income to increase your payments enough to pay off your non-mortgage debts. We help many people with debts in this range make a successful proposal for partial repayment to their creditors.
50% or more: Dangerous. If debt repayment is taking up more than 50% of your paycheque, you are facing a debt crisis that you probably can’t deal with on your own. It’s time to talk about options for debt forgiveness, so you can lower your monthly payment to a much more affordable level.