To determine the appropriate percentage of your total debt from all loans relative to your gross monthly salary, let's explore some standard financial guidelines.
Financial experts commonly refer to the debt-to-income (DTI) ratio when evaluating one's debt levels in relation to their income. The DTI ratio is the percentage of your gross monthly income that goes towards paying your monthly debt obligations. There are two types of DTI ratios: the front-end ratio and the back-end ratio.
1. Front-End Ratio: This ratio considers only housing-related expenses (e.g., mortgage payments, property taxes, insurance, etc.), and while important, it's less relevant to this specific question since it focuses on all loans.
2. Back-End Ratio: This ratio takes into account all monthly debt obligations, including housing expenses, credit card payments, personal loans, student loans, car loans, etc. This is the ratio we need to consider to answer the question.
The back-end DTI ratio typically recommended by financial advisers and mortgage lenders usually should not exceed 36% of your gross monthly income. This ensures that an individual does not overextend themselves financially and can still meet other necessary expenses and savings goals.
Given this understanding, the best answer to the question, "Your total debt from all loans should not exceed what percentage of your gross monthly salary?" is:
c) 36 percent
This percentage is a commonly accepted threshold for maintaining financial health and creditworthiness.
