What is the debt ratio? (2024)

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What is the debt ratio? (1)

Having debts is not bad in itself. A mortgage or a car loan, for example, are debts. But the situation becomes more complicated if your debts exceed your ability to repay them. You are then “overleveraged.”


  • Whether it be “good” or “bad,” a debt is problematic when you are no longer able to pay it back on time.
  • By calculating the ratio between your income and your debts, you get your “debt ratio.” This is something the banks are very interested in.
  • A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan.

To avoid ending up in “overleveraged” situation, it’s important that you know and understand your debt ratio. We’ll explain what it is.

The debt ratio explained

The debt ratio is a measure that indicates the ratio of your income to your debts. Some also call it the “indebtedness ratio” or “debt load.”

The debt ratio measures the gross annual income required for monthly payments on all debts.

Every time you want to borrow from your bank, your debt ratio is calculated. The result is a picture of your finances. Specifically, it tells the bank whether you will theoretically be able to repay the loan you are applying for.

How do I calculate my debt ratio?

Calculating your debt ratio is simple: divide your total gross monthly debt payments by your gross monthly income. Which debts? Debts include what people call “good” debt—like your mortgage—and what is considered “bad” debt—like the balance on a credit card you used for a trip. Your total debts should include your car loan payment, your 36-month fridge loan payment, etc.

Here’s an easy-to-use tool to help you calculate your debt ratio.

What is the debt ratio? (2)

Do I need to worry about my debt ratio?

If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty.

A debt ratio between 30% and 36% is also considered good.

It’s when you’re approaching 40% that you have to be very, very vigilant. With a threshold like that, you’re a greater risk to lenders. You may already be having trouble making your payments each month. As a result, lenders may deny you a car loan, a student loan or a mortgage, for fear that you won’t be able to pay them back.

What do I do if my debt ratio is over 40%?

You should see this as a wake-up call. This is probably a sign that your debts are taking up too much room in your finances. And, contrary to what many people believe, over-indebtedness is not just a “bad patch.” It’s a situation that can quickly become a spiral.

Fortunately, there are ways out of this. The important thing is to act quickly. Why not now?

Meet with one of our counsellors for free

Don’t ignore a debt problem that’s ruining your life. Let’s work together to help you regain control of your finances.


What is the debt ratio? (2024)


What is the meaning of debt ratio? ›

The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company's assets that are financed by debt.

What is a good total debt ratio? ›

Do I need to worry about my debt ratio? If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.

How do you calculate your debt ratio? ›

How do I calculate my debt-to-income ratio? To calculate your DTI, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.

What does a debt ratio of 80% mean? ›

What if the debt ratio was much higher, like 0.8, or 80%? A debt ratio this high would throw up a red flag to the bank. At this level, the company would appear to have most of their assets funded by debt and would be a high risk for the bank.

What is a too high debt ratio? ›

Key takeaways. Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

What is a bad debt ratio? ›

The bad debt to sales ratio represents the fraction of uncollectible accounts receivables in a year compared to total sales. For example, if a company's revenue is $100,000 and it's unable to collect $3,000, the bad debt to sales ratio is (3,000/100,000=0.03).

Is 50% debt ratio bad? ›

50% or more: Take Action - You may have limited funds to save or spend. With more than half your income going toward debt payments, you may not have much money left to save, spend, or handle unforeseen expenses.

Is 50% debt ratio good? ›

Interpreting the Debt Ratio

Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.

Is a 7% debt-to-income ratio good? ›

DTI is one factor that can help lenders decide whether you can repay the money you have borrowed or take on more debt. A good debt-to-income ratio is below 43%, and many lenders prefer 36% or below. Learn more about how debt-to-income ratio is calculated and how you can improve yours.

What is an example of a debt ratio? ›

Let's say you have 600,000$ in total assets and 150,000$ in liabilities. To calculate the debt ratio, divide the liability (150,000$ ) by the total assets (600,000$ ). This results in a debt ratio of 0.25 or 25 percent.

How can I lower my debt-to-income ratio quickly? ›

To do so, you could:
  1. Increase the amount you pay monthly toward your debts. Extra payments can help lower your overall debt more quickly.
  2. Ask creditors to reduce your interest rate, which would lead to savings that you could use to pay down debt.
  3. Avoid taking on more debt.
  4. Look for ways to increase your income.

What is a 3 to 1 debt ratio? ›

Example of Debt to Equity Ratio

A corporation with $1,200,000 of liabilities and $2,000,000 of stockholders' equity will have a debt to equity ratio of 0.6:1. A corporation with total liabilities of $1,200,000 and stockholders' equity of $400,000 will have a debt to equity ratio of 3:1.

Is 0.2 a good debt ratio? ›

Low debt ratio: If the result is a small number (like 0.2 or 20%), it means the company doesn't owe a lot compared to what it owns. This is usually a good sign. A lower debt ratio indicates a healthier financial position.

Is 60% debt ratio bad? ›

From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money.

How much debt is too much? ›

Most lenders say a DTI of 36% is acceptable, but they want to lend you money, so they're willing to cut some slack. Many financial advisors say a DTI higher than 35% means you have too much debt. Others stretch the boundaries up to the 49% mark.

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