Debt to Income: How to Calculate Your Debt

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The first step in conquering your debt is knowing exactly how much you have and how long it will take to repay it. To calculate your debt, you need to determine how many lenders you owe, what the interest rates are on each amount owed and what the repayment agreements are. Keep reading to untangle the different types of debt and common financial terms for each.

How to calculate your debt

Once you know which debts you’re carrying, you can calculate how much you owe.

  • Start by totaling the debt for each account. Write down the current balance, but also document the amount you’ll owe over time. How do you get that number? Your lenders should be able to tell you the total cost of your debts based on your current repayment timeline and your interest rate. They can also tell you what you’ll save if you pay more than your minimums each month. Credit card companies are required by law to include that information in your monthly statement, but if you can’t find it, speak with your lenders directly.
  • Then you can add up the total amount on those accounts. This gives you a full picture of what you owe today and what you will pay on your debts if you stay on your current repayment plans. For instance, if you have a $20,000 personal loan at 4.5% interest, and you pay $317 for 72 months, the total cost of the loan will be $22,859. But if you increase your monthly payments to $595, you’ll be paid off in 36 months for a total of $21,418, saving $1,441.
  • If your total debt amount alarms you, don’t panic. Creating a budget can help you identify areas where you can cut spending and put that money toward your debts. You can also contact a debt management counselor — many provide a free consultation and can help you strategize on how to lower your debt.

What are the different types of debt?

The most common debts among Americans are mortgages and student loans, along with car payments, credit cards and personal loans. Each debt account carries a different interest rate and repayment terms, even within the same category. So, your payoff dates may vary.

The first step in learning how to calculate your debt is itemizing all of the accounts on which you owe. Your list might include any of these types of debt:

Mortgage: The average U.S. household mortgage debt in 2018 was roughly $214,000, according to research by LendingTree, the parent company of ValuePenguin. Your mortgage is often referred to as a type of good debt. That’s because although you may have taken on debt to purchase your home, it’s also an asset that could potentially increase in value over time. It is also a form of an installment debt, which is treated differently by credit scoring models than revolving debt, such as credit cards. It’s good to carry a mix of both installment loans, like a mortgage or auto loan, as well as revolving debts, to keep your accounts diversified.

Student loans: Student loans can feel like a huge burden, especially if you’re like the average borrower and carry more than $32,000 in student debt. Ideally, this type of debt can help you secure a well-paying job long-term, so it may be viewed as a worthy investment. Like a mortgage, student loans are installment loans, and they factor into your credit score differently than high balances on your revolving credit lines. They’re also likely fixed-rate, whereas revolving credit is typically variable, so you can anticipate what your payments will be throughout the life of the loan.

Home equity loan or home equity line of credit: A home equity loan or line of credit is a type of loan secured by your house. If you default, the lender can foreclose on your home. The key difference between these two loans is how you repay them. A HEL is paid out in a lump sum and repaid over a fixed period of time. When you are given a HELOC, you draw on the total balance as you need it, similar to a credit card. Then you only owe what you end up borrowing. A home equity loan typically carries a fixed interest rate, but HELOCs are variable-rate products. If you are worried about interest rates rising or are concerned about potential changes in your income, you may want to prioritize paying off a HELOC because rising rates can make your payments more difficult to cover.

Personal loans: Unsecured personal loans are issued as a lump sum and repaid over a fixed period of time. They can be used for a wide range of purchases, from consolidating debt to upgrading your kitchen.

Auto loans: An auto loan is another type of installment debt. Your loan is secured by the value of the car itself and carries a fixed repayment term and typically a fixed interest rate.

Credit card debt: Debts in this category include cards issued by your regular bank, those issued directly from credit card companies and any store cards you receive through a retailer. How much you pay on your credit card depends on your interest rate, so monthly bills can vary greatly based on your balance and rate. Credit cards may carry variable APRs that can fluctuate over time, or fixed APRs that the lender can also adjust.

Medical debt: Medical debt encompasses any outstanding payments you owe medical providers, whether that’s for office visits or major procedures. Medical bills make up less of a burden for most people — the median medical debt in collections in the U.S. is $684, compared with $2,300 in median household credit card debt — but it can still be stressful if you’re struggling to pay it off.

Payday loans: Payday loans are short-term loans intended to cover financial gaps between paychecks. However, payday lenders typically charge extremely high interest rates, making these loans quite difficult to repay. Depending on your lender’s rate, you could be paying 400% in interest, which can spiral very quickly into a huge debt.

Back taxes: The only thing more unpleasant than doing your taxes is discovering that you owe more than you anticipated, particularly if you can’t pay that amount in full. The IRS and state governments offer payment plans, but you may accrue payment penalties and interest on those debts, so your final tax bill can balloon significantly by the time you finally pay it off.

The 28/36 rule

The 28/36 rule stipulates that you spend a maximum of 28% of your monthly income on housing expenses and no more than 36% on your debts. If your debt payments exceed 36%, you risk hurting your credit score and decrease the chances of being approved for financing when you need it — especially at competitive rates. You’re also more likely to feel a financial pinch every month, so you want to bring down that percentage as quickly as possible.

How do you figure out your debt-to-income ratio?

Following the 28/36 rule also matters because it affects your debt to income ratio (DTI). DTI is a factor lenders consider when deciding loan approvals and interest rates. The higher your DTI, the greater a risk you represent for falling behind or defaulting on your payments. If your DTI is 50% or more, your chances of being approved for a loan may decrease, and you should prioritize paying down those accounts.

To determine your DTI, total your monthly debt payments and divide them by your gross monthly income. The result is your DTI. Again, if that number is higher than 36% — or 0.36 when you’re doing the math — you’ll want to prioritize getting it below that threshold.

There are two types of DTI calculations lenders use: front-end and back-end DTI. It’s helpful to understand both so you’re not caught off-guard when working with lenders.

A front-end DTI calculation divides only your housing expenses — which may include rent or mortgage, homeowners insurance and property taxes — by your gross monthly income. Back-end DTI calculations don’t account for your housing expenses at all, but include other types of debt, such as student debt or car loans.

Here’s what that looks like in practice. Let’s say your total monthly housing expenses are $1,200. You also pay $300 a month on your car loan and $600 a month on a student loan. Your monthly income is $5,000.

Using the DTI formula of debt payments divided by monthly income, your ratios would be:

Front-end DTI: $1,200 ÷ $5,000 = 0.24 or 24%

Back-end DTI: $900 ÷ $5,000 = 0.18 or 18%

Those are solid ratios because not only are your debts low compared with your income, your housing costs fall under the 28% rule.

How long will it take to pay off your debt?

Your debt payoff timeline depends on how much you owe and how much you can afford to pay off your debts each month. Use an online debt calculator to play out different repayment scenarios and figure out what you can realistically put toward your loans each month.

There are different strategies you can use to approach repayment, including the popular snowball and avalanche tactics.

Under the debt snowball method, you pay your minimum payments on all but your smallest debt. Any extra money you have each month after meeting your necessary expenses goes toward the smallest debt. Once that one is paid off, you move onto the second smallest debt and do the same thing. After that’s paid, you move on to the third, and so on until your debts are cleared. The idea is that by achieving these small wins and emphasizing one debt at a time, you gain momentum and psychological motivation to keep aggressively paying off your accounts.

The debt avalanche strategy applies the opposite philosophy. You pay your minimums on all but your highest-interest debt, and any extra income goes toward that balance. Why? Because high-interest accounts cost more long term, so you want to eliminate those first and use the money saved toward paying off your other debts.

Whichever strategy you choose, be mindful of prepayment penalties. Mortgages and car loan contracts often include penalty fees if you pay off the loan sooner than the terms stipulate. The penalties can reach thousands of dollars, so you may be better off focusing on higher-interest debts and accounts without penalties. Then, once all of the other accounts are cleared, you can decide whether it’s worth paying the penalties or sticking to the original terms. You can always set aside several months’ worth of payments for peace of mind, but only send them once your regular bill comes due.

Your repayment timeline really depends on your income and budget. That’s why a calculator is useful — because you can figure out a realistic, sustainable amount you can pay each month and stick to that timeline.

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