Are you worried about how much debt you have? Debt can be a necessary part of life. The ability to borrow money and pay it back in installments helps you afford major purchases like a car, a house, or an education.
Debt should help you build your life up. But if you borrow too much, debt can quickly become a burden dragging you down. How are you supposed to know how much debt you can really afford?
Total Debt Servicing Ratio (TDSR)
When lenders talk about much how much debt potential borrowers have and how much more they can reasonably be expected to afford, they refer to a Total Debt Servicing Ratio (TDSR).
As far as banks are concerned, the maximum amount of debt that a person can afford is a 40% TDSR, i.e., your monthly debt payments take up 40% of your before-tax income. Here’s what the bank includes in monthly debt payments:
- Credit card payments if you don’t pay your full balance each month
- Car payments
- Mortgage payments
- Line of credit payments
- Student debt payments
- Utilities such as heat
- Taxes
If your TDSR is over 40%, some subprime lenders may give you high-interest credit. At this point, you are at a higher risk for insolvency. Your TDSR is something that banks will look at any time you apply for a mortgage or a car loan. Your TDSR can also help you find financial danger signs before they take over your life.
How Much Debt Can Your Budget Afford?
A 40% TDSR is a major debt load that will significantly impact your standard of living. Living off the remaining 60% of your income (before taxes) will be tight, especially if you live in a major city like Toronto where the average housing cost and rent take up a considerable amount of income.
The general rule of thumb is that you can afford to pay 30% of your income on rent; that’s often unrealistic and many are paying far more. If you’re living with a 40% TDSR and spending 40% of your income on rent, you’re only a paycheque away from serious financial trouble. One option may be better debt management, and these tips for cutting expenses can help.
Sudden job loss, illness, separation, or unexpected expenses quickly turn into an inability to keep up with debt payments. That’s when it’s time to talk to a bankruptcy trustee, now known as a Licensed Insolvency Trustee. You can come visit us at David Sklar & Associates for a free consultation.
A bankruptcy trustee will discuss your options. You may be able to repay your debt with a simple debt management plan, or you may need to file for bankruptcy or a consumer proposal.
When you get a free consultation at David Sklar, a bankruptcy trustee will walk you through your options. If you can’t afford to pay back the debt you have accumulated, you’re considered insolvent. That gives you options for getting out of debt with some relief. Talk to a bankruptcy trustee if you’re worried about how much debt you have.
