People who come to us for consultation often question the severity of their indebtedness. Are they worrying unnecessarily, or are they truly on the brink? We explore here the factors involved in this assessment.
The Debt-To-Income Ratio as an Indicator?
In the realm of personal finances, the “debt-to-income ratio” (also known as “debt ratio“) is a popular indicator used notably by lenders. It calculates the proportion of a person’s income dedicated to financial obligations, helping banks determine the debtor’s ability to meet monthly payments.
While the debt-to-income ratio is useful for financial institutions to manage their risk levels, it is less informative for the consumer. It allows the consumer to understand if they can “survive” their monthly payments but does not necessarily indicate if they will eventually overcome their indebtedness.
The Total Amount of Debt?
We assist individuals with debts as low as $5,000 and as high as $500,000. The total amount of debt is rarely a reliable indicator to determine if the level of indebtedness is manageable or problematic.
The problematic nature of debts varies significantly from one person to another based on their income and dependents. Additionally, the interest rate is crucial. A $100,000 balance on a mortgage is much less concerning than $20,000 on a credit card at 20%, or $5,000 in “quick cash loans” at a 35% interest rate.
What Is the Best Indicator?
So, how do you know if you are overindebted to the point of needing to explore alternative solutions?
According to our experience, the best factor to assess is the time required to eliminate “bad debts.”
In the category of bad debts, we include:
- Credit cards,
- Lines of credit,
- Tax debts,
- Overdue bills,
- “Fast cash loans.”
Bad debts are those that we carry around like a ball and chain. They are often expensive in terms of interest rates and they are sneaky because they do not necessarily have a maturity date.
In comparison, “good debts” include mortgages and auto loans, provided the amounts are reasonable. These debts are generally considered “good” because they provide a service: housing and transportation to work.
Feeling Trapped?
If you realize that you are unable to eliminate your “bad debts,” this is the moment to turn to a Licensed Insolvency Trustee.
If you believe that you will spend a lifetime repaying your debts without ever being able to save for retirement, seek help.
It is not uncommon to encounter individuals who have been carrying bad debts for years, never able to eliminate or even reduce them. When calculating the amount paid in interest over the years, it can be shocking. Sometimes, the interest can even exceed the original amount of the debt.
If you find yourself in a situation where you don’t see the light at the end of the tunnel, now is the time to seek help.
If you feel trapped by your bad debts, consult with us, free of charge and without obligation.
