What Is Debt Load?
Debt load is a term that is used to describe a consumer's amount of debt.
It is often used to understand if you are carrying a "safe" amount of debt. Creditors look at a debt/income ratio, comparing your income with your debts to analyze whether you have too much debt. The debt/income ratio is figured monthly and reveals either how good -- or bad -- your financial picture is on a day-to-day basis.
You can figure this ratio for yourself. Add up all of your non-housing monthly payments except for your utilities and taxes. Then compare that total with your total gross annual wages divided by 12. If you don't have fixed monthly payments on revolving debts such as credit cards, you can estimate your monthly payments at 4% of the total amount you owe. When you divide your monthly debt payments by your total monthly income, you will get your monthly non-housing debt/income ratio. It is usually expressed as a percentage, so move the decimal point two places to the right.
Gross monthly income is $2,000
Monthly debt is $500 (credit-card payments, gasoline bills and car payments)
$500÷$2,000 = 0.25
Your debt/income ratio is 25%
Rule of thumb
If your non-housing debt is 10% or less, you're in great financial fitness. If your non-housing debt is between 10% and 20%, then you'll probably be able to get credit. But the closer you get to 20%, the closer you get to the edge of a reasonable debt load.
As for the housing debt that's been left out of your calculations, there have been many attempts to devise formulae for setting limits on the amount of real-estate debt one should carry. One philosophy recommends the rate of twice to three times your annual income. If the annual household income is $70,000, then, a mortgage grantor might loan up to $210,000, provided the house is worth the money and the other credit factors are satisfactory.
But consumers should receive this information with temperance. Just because a lender may be prepared to extend credit up to a certain ceiling doesn't mean you should reach for it. You should also factor in your own specific fixed and variable expenses to determine your ability to pay. How much you spend on real estate may depend on what area of the country you live in. And remember: if you clock in high on the real-estate debt, you probably want to compensate with a lower debt/income ratio.