Do You Have Too Much Debt?

Paying Off Debt, Personal Finance
How Much Debt Is Too Much?

How much debt is “too much” depends on what kind you have and what it’s doing to your financial life. 

Debt is toxic when it costs you too much — in money or lost opportunity — or carries too much risk:

  • The annual percentage rate is above 36%, generally seen as the top end of “affordable”; payday and no-credit-check loans, for example, can be around 400% APR.
  • The APR is under 36% but still in double digits, is subject to change and can’t be deducted; that describes credit card debt, which erodes rather than helps your financial security
  • The loan runs so long that you end up paying a lot more in total than the item is worth, such as with rent-to-own schemes 
  • You have to put up collateral you can’t afford to lose, such as a car-title loan that puts you at risk of repossession
  • You have too much debt to handle, and payments crowd out financial goals like saving even a small emergency fund or covering necessities

Your first debt-payoff priority should be addressing the types of debts most likely to be toxic.

Are my other types of debt a problem?

Debt with lower interest rates and reasonable repayment periods are generally not considered toxic, especially if the interest rate is fixed rather than variable. But that doesn’t mean they can’t be overwhelming. These guidelines give you an idea of how much is too much in these debt categories and what to do if you’re overloaded:

Housing

Guideline: Limit your housing costs to 25% of your income or less so you can work toward other important financial goals. Aim to have your house paid off by the time you’re ready to retire.

How to handle an overload: If your home payments are not manageable, look into refinancing. You might even consider selling and downsizing or moving to a lower-cost area if you can. If you’re refinancing or changing homes in your 40s or 50s, go with a 15- or 20-year mortgage if possible so you can be mortgage-free by retirement age.

Student loans

Guideline: In general, college students shouldn’t borrow more for a degree than they expect to make their first year out of school.

How to handle an overload: Explore your repayment options, including income-driven repayment plans and refinancing.

Car loans

Guideline: Aim to keep your car payments in the range of 5% to 10% of your gross monthly income. Car loans should be for four years or less and ideally accompanied by a 20% down payment. That way you don’t spend years owing more than the car is worth.

How to handle an overload: If you have an unaffordable car loan, look into how to change or get out of the loan.

Medical debt

Guideline: Medical debt is generally interest-free, but the amounts involved can make it unmanageable. 

How to handle an overload: Take steps to cover the costs on your own if possible, but you may need to look into debt relief. If your total debt, except for mortgages and student loans, exceeds 50% of your income, consider talking with a nonprofit credit counselor and a bankruptcy attorney to learn about your options.