What is a decent debt ratio?
By calculating the ratio between your income and your debts, you get your “debt ratio.” This is something the banks are very interested in. A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan.
This compares annual payments to service all consumer debts—excluding mortgage payments—divided by your net income. This should be 20% or less of net income. A ratio of 15% or lower is healthy, and 20% or higher is considered a warning sign.
If you have a DTI ratio between 36% and 49%, this means that while the current amount of debt you have is likely manageable, it may be a good idea to pay off your debt. While lenders may be willing to offer you credit, a DTI ratio above 43% may deter some lenders.
A debt ratio below 0.5 is typically considered good, as it signifies that debt represents less than half of total assets. A debt ratio of 0.75 suggests a relatively high level of financial leverage, with debt constituting 75% of total assets.
Interpreting the Debt Ratio
Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low. However, what constitutes a “good debt ratio” can vary depending on industry norms, business objectives, and economic conditions.
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
Conversely, a debt ratio above 0.6 or 0.7 (60-70%) is a higher risk and may discourage investment. The highest possible ratio is 1.0, which shows that a company can sell all of its assets to cover its debts, leaving no assets after the sale.
How much debt should a small business have? As a general rule, you shouldn't have more than 30% of your business capital in credit debt; exceeding this percentage tells lenders you may be not profitable or responsible with your money.
DTIs between 42% and 49% suggest you're nearing unmanageable levels of debt relative to your income. Lenders might not be convinced that you will be able to meet payments for another line of credit.
According to a breakdown from The Mortgage Reports, a good debt-to-income ratio is 43% or less. Many lenders may even want to see a DTI that's closer to 35%, according to LendingTree. A ratio closer to 45% might be acceptable depending on the loan you apply for, but a ratio that's 50% or higher can raise some eyebrows.
Can you get a mortgage with 55% DTI?
If you are truly trying to afford more home than what traditional lenders will allow, there are lenders who have special programs with a maximum back end DTI of 50%-55%. Lenders who offer high DTI mortgages are portfolio lenders who keep the loans in their own portfolios or sell them to private investors.
A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.
What if the debt ratio was much higher, like 0.8, or 80%? A debt ratio this high would throw up a red flag to the bank. At this level, the company would appear to have most of their assets funded by debt and would be a high risk for the bank.
A good DTI ratio is 36% or less. This means that your total monthly debts, including your mortgage payment, car payment, student loans, and credit card payments, should be no more than 36% of your gross monthly income.
That means the debt ratio is 0.75, which is highly risky. It indicates for every four assets; there are three liabilities. The startup is highly leveraged, and there is a minimal chance that the bank would award the business the loan based solely on this information.
Key Takeaways
If you cannot afford to pay your minimum debt payments, your debt amount is unreasonable. The 28/36 rule states that no more than 28% of a household's gross income should be spent on housing and no more than 36% on housing plus other debt.
| Generation | Average total debt (2023) | Average total debt (2022) |
|---|---|---|
| Millenial (27-42) | $125,047 | $115,784 |
| Gen X (43-57) | $157,556 | $154,658 |
| Baby Boomer (58-77) | $94,880 | $96,087 |
| Silent Generation (78+) | $38,600 | $39,345 |
According to Experian, average total consumer household debt in 2023 is $104,215. That's up 11% from 2020, when average total consumer debt was $92,727.
FHA loans have more lenient qualification requirements than other loans. Borrowers must have a minimum credit score of 580 to qualify for the loan. The maximum DTI for FHA loans is 57%. However, a lender can set their own requirement.
If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.
What does a debt ratio of 55% mean?
It is an indicator of financial leverage or a measure of solvency. 1 It also gives financial managers critical insight into a firm's financial health or distress. If, for instance, your company has a debt-to-asset ratio of 0.55, it means some form of debt has supplied 55% of every dollar of your company's assets.
Total debt on the balance sheet as of December 2023 : $9.57 B. According to Tesla's latest financial reports the company's total debt is $9.57 B. A company's total debt is the sum of all current and non-current debts.
If your business is struggling with debt, one option to consider (other than bankruptcy) is selling the business. If you're struggling with small business debt, selling your business is one alternative to filing for bankruptcy.
Equity financing may be less risky than debt financing because you don't have a loan to repay or collateral at stake. Debt also requires regular repayments, which can hurt your company's cash flow and its ability to grow.
Auto loans can be good or bad debt. Some auto loans may carry a high interest rate, depending on factors including your credit scores and the type and amount of the loan.
