You notice most of your salary is going towards your debt repayments each month, you cannot afford to put money towards a savings account, you purchase your groceries with your credit card, and your credit applications are being rejected. These are all signs you’re carrying too much debt.
But how much is too much?
A method that is used to calculate the load of debt you have is the debt-to-income (DTI) ratio. This method is often used by banks when assessing your affordability when you apply for a loan.
DTI refers to the portion of your income that goes towards paying your debt. A low DTI ratio shows a good balance between debt and income.
To calculate this, add all of your various monthly debt repayment instalments together and divide them by your gross income – that is your income before any deductions such as taxes, insurance, and medical aid. Your debt repayments include your personal loans, mortgages, car finance, credit cards and student loans.
If the bank finds that more than 43% of your income is spent on covering your debt, you are not likely to get the loan. However, if it’s lower than 36%, your loan application will be approved, given that you meet other requirements.
A lower DTI demonstrates that you will be able to meet your monthly repayments.
Ways to reduce your debt
- Sift bad debt from good debt: Student loans and mortgages can be considered good debt because they usually yield some form of return. Credit cards and store cards are not investments and they usually carry higher interest rates than other debts. Prioritise paying off your bad debt as soon as you can.
- Get an extra income: Do not overextend yourself, but if you have extra time and an opportunity to do more work, take advantage of it. A second income will help you settle your debt faster.
- Budget: Ensure you create an effective spending plan. Write down all your expenses and cut down on the unnecessary ones. List them according to their importance. This will help you see if there is extra cash you can stash away.
- Save: Get into the habit of saving. Even R100 a month will go a long way. Saving will ensure you never have to borrow when you are short of cash – plus, you can use this to pay off your debt if necessary.
- Look out for debt settlement discounts: DebtBusters’s debt settlement department can organise you a settlement discount with your creditors when you put a lump sum towards paying off your debt.
- Apply for debt counselling: If you find that you are struggling to meet monthly repayments, consult a debt counsellor who will help you consolidate your debt without taking out an additional loan.
DebtBusters can help you restructure your debt repayments, making it easier for you to repay your loans. Contact our friendly consultants on 086 999 0606 or email to [email protected]