Repaying the debt is not as easy as borrowing money. Even though you have a short-term loan, it sometimes becomes hard to pay off the loan on time. Most of the people think that small loans are much more manageable than long-term loans because you can get rid of the burden at once as you have to repay the loan in a lump sum, but a few of you manages to settle all dues on time.

Some people end up adding up the cost of the loan because of interest penalties and late payment fees. Debt always causes stress, contributes to depression, and pulls apart families, but most of the people have changed the outlook toward debt. It seems reasonable to have thousands of pounds as debt in your name, but the fact is it is not healthy at all.

Of course, you cannot say that you would not need to borrow money ever. You can prepare a budget to meet all of your regular expenses, but sometimes unforeseen expenses catch you on the wrong foot.

You may need to borrow money to fund them because you lack savings, but the problem is you do not understand how much you can afford and when you should stop from borrowing money no matter what. You keep taking on debt and eventually realise that you cannot pay off the debt. This raises the question when debt is considered too much debt.

If you want to be financially secure, you should have debt as low as possible. To know if you have debt too much, you will need to analyse a debt-to-income ratio. According to FCA guidelines, you should keep your debt-to-income ratio as low as 45%.

If you have debt beyond 45%, you will struggle to make repayments. As a result, you will end up rolling over the loan or robbing Peter to pay Paul. The most common signs of too much debt include but not limited to:

·         You are living from paycheque to paycheque.

·         You often use credit cards to make purchases.

·         You do not have an emergency cushion, nor do you have a savings account.

·         Your debt balance continues to be the same despite making repayments.

·         You cannot contribute to retirement funds because of a lack of money.

·         The total amount of debt is more than 50% of your income.

Find out a debt-to-income ratio

You will have to figure out a debt-to-income ratio to ensure you are not in a debt trap. A debt-to-income ratio suggests that the amount of debt you have to pay against your income. The higher the ratio, the poorer your financial condition will be.

A good rule of thumb says that you should keep the debt-to-income ratio as 30%. To calculate the ratio, you will have to add up the total cost of the debt and then divide it by your total monthly income.

Remember that the total cost of the debt also includes fixed expenses like rent, credit card payments, child support, and the like. It cannot cover expenses like utility bills, broadband, subscriptions, insurance, groceries, and so forth.

These expenses do not add in because they are not fixed. If the total debt is £1000, and your total monthly income is £4000, the debt-to-income ratio is 25% (1000/4000). This is an ideal ratio. Lenders will not treat it a high ratio. Knowing debt-to-income ratio can also help you the likelihood of having a loan signed off on.

If you need to apply for a very bad credit loan, the lender may reject your application due to the high debt-to-income ratio. To avoid rejections, make sure that you keep it as low as possible.

What to do if you have too much debt?

If it is hard to pay off debt, you should talk to a financial advisor. You can consider debt management plans and debt consolidation loans. However, the financial advisor will recommend any of the options after reviewing your financial situation.

The bottom line is debt can take a toll on your financial life. It should not be more than 30% of your income ideally, but you can manage to pay back if it is not more than 45%.

 

Description: Debt is considered too much when it is more than 454% of your income. This blog discusses the sign of too much debt and ways to get rid of them.