Debt Load and Your Finances

A clear picture of your debt load is a first step toward healthier finances.

What Is Debt Load?

Debt load is the total amount of debt you owe, including loans, credit card balances, and other obligations. It's often measured by the debt-to-income (DTI) ratio, which is the total of your monthly debt payments divided by your monthly income (before taxes). For example, if you pay $2,000 monthly in debts and earn $6,000 monthly, your DTI is $2,000 / $6,000, or 33%.

Debt load includes both secured debt, like mortgages and auto loans, and unsecured debt, like credit cards and personal loans.

Individual debts might be manageable. Multiple debts could combine to weigh you down. That's why many borrowers turn to debt relief solutions. 

One such solution is debt consolidation, which could simplify your debt and lighten the burden on your monthly budget. Your ability to handle your debt load depends on your income, savings, and other factors.

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How to Calculate Your Total Debt Load

Here's how to calculate your debt load, debt-to-income ratio, and net worth. These numbers could help you make a repayment plan with confidence.

How to calculate what you owe

Step 1: Gather your information.

Create a list of all your outstanding debts. Include:

• Credit cards

• Personal loans

• Auto loans

• Student loans

• Mortgages

• Any other installment or revolving debt

You don't need to include monthly utilities, subscriptions, or other living expenses. This calculation focuses on borrowed money.

Step 2: Write down balances and minimum payments.

For each debt, record the total balance and the required monthly minimum payment.

Step 3: Add them up.

Add together the balances to get your total debt load. Separately, add the minimum payments together for the total amount you must pay each month to stay current.

Example:

• Credit cards: $8,500 balance, $250 monthly minimum

• Auto loan: $12,000 balance, $320 monthly minimum

• Student loans: $7,500 balance, $100 monthly minimum

Total debt load: $28,000 / Total monthly minimums: $670

This snapshot could help you explore repayment strategies like debt settlement, consolidation, or refinancing.

To find out, calculate your debt-to-income ratio next.

How to calculate your debt-to-income ratio (DTI)

Your debt-to-income ratio tells you how much of your income is spent on debt:

• Add up your total monthly debt payments.

• Add up your total monthly gross income (before taxes).

• Divide your monthly debt payments by your monthly gross income.

• Multiply the result by 100 to get a percentage.

Say your monthly debt payment is $670, and your yearly income before taxes is $60,000. To get your monthly income, you divide $60,000 by 12 and get $5,000.

DTI = monthly payment ÷ income

DTI = 670 ÷ 5,000 = 0.134

Move the decimal place two places to the right and add a percentage sign to get your debt-to-income ratio: 13.4%.

Low DTI means you're spending a small fraction of income on debt payments. Ideally, your DTI is under 43%. If it isn't, that's okay.

You could still apply for a new credit account, like a mortgage, with a higher DTI.

A higher DTI means more of the money you earn is already committed to debt payments, which leaves less available for food, utilities, transportation, and other expenses.

To understand what you'd have left after paying off your debts, calculate your net worth next.

How to calculate your net worth

Your net worth is the value of everything you own, including items of negative value, like debt. To calculate net worth, use these three steps:

• Add up your assets.

• Add up your liabilities.

• Subtract liabilities from assets.

Step 1: Add up assets

Assets are everything you own, including your house, furniture, car, investments, and anything else you could sell for money. It also includes cash. If you're not sure what something is worth, make your best guess.

Step 2: Add up liabilities

Liabilities are everything you owe, including credit card debt, mortgages, interest, student loans, and personal loans.

Step 3: Subtract liabilities from assets

Your net worth is equal to your assets minus liabilities.

Example:

Assets vs. liabilities

In this example, your net worth is $54,000.

As you pay off debt, your net worth could increase. The higher your net worth, the more secure you might feel financially.

Impact of Debt Load on Your Finances

A large debt load restricts your financial flexibility by committing a portion of your income to payments over time. Here's how it impacts you:

• Daily expenses: Debt load reduces income for everyday expenses.

• New credit: A high debt load limits your ability to take out additional loans.

• Savings: Monthly payments shrink what you have left over to save or invest.

• Wealth: Your debt load directly lowers your net worth.

• Credit score: Too much debt load could harm your credit, raising your borrowing costs.

Debt load and your net worth

Your net worth is your total assets, like home value, cash savings, and brokerage balances, minus your debts. Secured debt is usually at least partly offset by the asset it's tied to, while unsecured debt, like credit cards, may not be offset by anything of value and can reduce your net worth. 

Your debt-to-income ratio measures your debt load against your income, while your net worth measures it against what you own. Tracking both gives a fuller picture of how manageable your debt load really is.

How lenders understand your debt load

Your DTI tells lenders whether you have room in your budget for a new payment. Lenders calculate it using the debts on your credit report and your reported income, then weigh it alongside your credit history. 

Lenders may deny your application if your DTI is above 45% to 50%, and they're generally more accepting when most of your debt comes from mortgage payments rather than credit card interest. Carrying a large credit card balance relative to your total credit limit could also hurt your score, and a lower debt load could help improve it.

Freedom Debt Relief is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

The real-life impact of a heavy debt load

A heavy debt load affects more than your bank account. Stress about bills could contribute to anxiety, sleep problems, and strained relationships, and it could affect job performance and overall well-being.. 

A high debt load could also delay milestones like buying a home, starting a family, or pursuing further education, since it could make it difficult to build savings or an emergency fund. Every dollar that goes toward interest is a dollar not saved or invested toward retirement or other goals.

Debt Load Benchmarks: What's Considered High?

There's no single number that defines a good or bad debt load. Your income, the type of debt you carry, and how comfortably you manage payments all play a part. Here are some general benchmarks to help gauge your situation:

The type of debt matters

Lenders often consider installment loans, like auto or student loans, more favorably than revolving debt, like credit cards. A $50,000 car loan may not raise concern if it's affordable with your income. A $50,000 credit card balance may signal more strain, since card rates run higher.

Warning signs your debt load is unmanageable

Signs you've reached an unmanageable debt load:

• You borrow to make payments on existing debt.

• You make only minimum payments each month.

• Your credit cards are maxed-out.

• You avoid opening bills because of stress.

If you recognize these signs, it may be a good time to reassess your finances or explore debt relief options. A plan to tackle debt could bring real relief.

Benefits of Reducing Your Debt Load

There are several benefits to reducing your debt load:

• Reduce total interest paid

• Free up cash for other priorities

• Peace of mind and less financial stress

• Potentially higher credit score, leading to more affordable borrowing opportunities when you need them

Strategies for Managing Your Debt Load

A few core strategies could help you manage your debt load:

• Budget: Track your income and expenses to keep your debt load light.

• Payment order: Learn about debt snowball vs. debt avalanche methods to help you choose a strategy that will work best for you.

• Debt consolidation: Combine debts into one loan to simplify payments or lower costs.

• Credit counselors: Consult a credit counselor if your debt load feels overwhelming. A credit counselor may suggest a debt management plan (DMP), a structured plan to fully repay your unsecured debts within three to five years.

• Debt relief: An umbrella term for any program that eases the financial or emotional weight of debt, including consolidation, credit counseling, and settlement.

Debt consolidation

Debt consolidation combines multiple debts into one loan with a single payment, which may lower your interest rate when you have steady income and good credit. Explore debt consolidation.

Credit counseling and DMPs

A debt management plan (DMP) through a nonprofit credit counseling agency may help lower interest rates and organize repayment when you're able to make full repayment. Learn more about credit card counseling pros and cons before signing up.

Debt relief and settlement

If you're struggling to make minimum payments, debt settlement may reduce what you owe. It could be a lifeline if other strategies haven't worked. You could negotiate with creditors directly or hire a professional debt settlement company to do it for you.

Debt settlement may negatively impact your credit.

Common Complications That Increase Debt Load

If your finances are tight, some of this might be impossible to avoid while you work on increasing income or decreasing other expenses. Try your best to avoid these red flags:

• You rely on credit for everyday expenses. Credit card charges for groceries, gas, or bills add up fast. If possible, use cash or debit instead for routine purchases unless you’re able to pay off your credit cards in full every month.

• You make only minimum payments. This extends repayment and increases interest costs. Pay more than the minimum whenever your budget allows, to save on interest.

• You take on new debt while repaying old debt. Continuing to add credit card charges while consolidating a loan leaves you deeper in debt. If possible, freeze your cards until your balances are under control. Minimum payments are still due either way.

• You ignore high-interest debt. Credit card balances grow when you put off paying them down. Pay down high-interest debt before lower-interest debt, like personal loans or mortgages.

• You wait too long to ask for help. Contact your creditor as soon as you know you'll struggle to make a payment and ask about a hardship program. You may be able to work something out before debt relief becomes necessary or before your credit score sustains extra damage.

Tips for Avoiding Future Debt Problems

A few deliberate habits could help you avoid an unmanageable debt load:

• Plan before borrowing: Build a budget that shows whether your income supports new debt payments alongside what you already pay.

• Build an emergency fund: Save for unexpected expenses to avoid increasing your debt load.

• Practice smart credit use: Avoid spontaneous purchases that inflate your debt load.

• Maintain financial discipline: Stick to your budget and pay down debt to keep your debt load in check.

A budget plan, even if you hate math, could help these habits stick.

When Professional Help Makes Sense

Debt is sometimes too much to manage alone. Seek professional support if:

• You've missed payments or are close to missing one.

• Your debt load keeps growing despite your best efforts.

• You're considering bankruptcy.

• You feel overwhelmed and don't know where to start.

Benefits of professional negotiation: Debt settlement firms may work directly with creditors to reduce the amount you owe, often creating more manageable repayment plans. This differs from consolidation or credit counseling, which generally focus on reorganizing or lowering interest rates.

For the details, review how Freedom Debt Relief works or learn about who we help. Professional help isn't right for everyone. For many, it's a turning point toward financial stability.

Support for a brighter future

Debt relief could provide the support you need, regardless of your age, FICO Score, or debt level. Take the first step today.