Are you steadily acquiring debt? Planning to get an auto loan but want to make sure you can afford to pay it off? Worried about accruing too much debt? You’re not alone and you’re right to wonder.
That’s why our Guelph auto loan team has put together this quick guide. Debt is something we should all be aware of but not worried about. This should help.
How much is too much?
So, let’s start with the headline, how much debt is too much debt? Unfortunately, there is no magic formula to tell you whether you have too much debt.
Typically, we recommend not spending more than 30-40% of your monthly income on debt payments. Those, alongside rent or mortgage, bills and other expenses would potentially leave you with nothing at the end of the month, which isn’t sustainable.
Monthly income is calculated as a gross. That means the amount you get in the bank each month rather than before tax and deductions.
Lenders tend to recommend 30% debt utilization ratio but that’s not the whole story. Your debt utilization ratio is based mainly around credit cards, although it does take other types of debt into account.
For example, let’s say you earn $3,000 per month and have a mortgage ($1000), student loan ($400), credit cards ($200) and other expenses ($100).
That all adds up to $1700 per month. Subtracted from your $3,000 income leaves you $1,300 per month. That sounds a lot, right?
But that $1700 is over 50% of your monthly income. Which is a warning sign to any lender.
On paper, it may seem like you have lots of money to spend each month and that debt is easily affordable. Yet in that example, even though you have money left over each month, over half of your income is paid out on debts.
That is too much.
In order for you to qualify for an auto loan, you would need to bring that level down much closer to 30%.
That would mean paying off your credit card and paying down that student loan. Either that or get a cheaper mortgage.
None of which are easy to do!
When too much is too much
There is another, more human side to debt. When does too much debt become emotionally too much? Or financially too much? When do your debt payments take all the fun out of life? When do they mean you have to choose between going out with the family and making a payment?
Then the debt is definitely too much!
We can talk math all day long but there is more to debt than just numbers. There’s the human cost too. Some people can handle debt better than others and you need to find out which is you.
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!
For any questions or concerns, please don’t hesitate to contact us here!