4.1.5 Debt load

How much debt is it appropriate to take on? It depends on your personal circumstances: how much money you make and how well you are able to repay the debt.

Experts often distinguish between consumer debt (money owed on items other than a mortgage, such as unpaid credit card balances, auto loans, store loans, etc.) and total debt (which includes mortgage debt in addition to consumer debt). As a general guideline:

• Your consumer debt payments should add up to no more than 15 to 20 percent of your gross monthly income (before taxes).
• Your total debt payments should add up to no more than 35 to 40 percent of your gross monthly income (before taxes).

Note that these are lenders' guidelines. You may be more comfortable with a lower debt ratio.

If your debt repayments amount to more than these percentages, you have a debt ratio that is higher than recommended by most experts. This might indicate that your debt load is becoming unmanageable, and, with your current income, you will not be able to meet the payments as they come due. This debt load might also discourage lenders from loaning you any more money.

Definitions

• Consumer debt: Money owed on items other than mortgage debt, including unpaid credit balances, auto loans, etc., normally not including regular expenses that are paid monthly, such as phone bills, utility bills, etc.
• Total debt: Consumer debt plus any mortgage loans
• Debt load: The total amount of money you owe
• Debt ratio: The amount of monthly debt payments you have relative to your monthly income.