Debt-to-income ratio targets
Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high.
Debt ratios must be compared within industries to determine whether a company has a good or bad one. Generally, a mix of equity and debt is good for a company, though too much debt can be a strain. Typically, a debt ratio of 0.4 (40%) or below would be considered better than a debt ratio of 0.6 (60%) or higher.
A 75% debt ratio means that 75% of a company's assets are financed by debt. While it indicates significant leverage, whether it's good or bad depends on the industry and the company's ability to manage debt. High ratios may increase financial risk but can also boost returns during favorable conditions.
Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”
The bad debt ratio measures the amount of money a company has to write off as a bad debt expense compared to its net sales. In other words, it tells you what percentage of sales profit a company loses to unpaid invoices.
37% to 42% isn't a bad ratio to have, but it could be better. If your ratio falls in this range, you should start reducing your debts. 43% to 49% is a ratio that indicates likely financial trouble.
A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt. Some sources consider the debt ratio to be total liabilities divided by total assets.
Bad debt - a tiny but menacing threat
The ratio measures the money a company loses on its overall sales due to customer(s) not paying their dues. The average bad debt to sales value in 2022 was 0.16%. The companies with the best ratio (best performers) reported a value of 0.02% or lower.
Debt-to-Equity Ratio
A higher ratio indicates a greater reliance on debt and higher potential financial risk. A healthy debt-to-equity ratio varies across industries, but as a general rule of thumb, a ratio above 2:1 is considered excessive debt.
Google (GOOGL) Debt-to-Equity : 0.09 (As of Sep. 2024)
A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.
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.
According to Experian, average total consumer household debt in 2023 is $104,215. That's up 11% from 2020, when average total consumer debt was $92,727.
35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.
The 20/10 rule is a financial strategy to help you avoid dangerous levels of debt. Simply put, the 20/10 rule advises that you should avoid accumulating long-term debt that exceeds 20% of your annual income, and you should avoid debt payments of more than 10% of your monthly income.
If you cannot afford to pay your minimum debt payments, your debt amount is unreasonable. The 28/36 rule states that no more than 28% of a household's gross income should be spent on housing and no more than 36% on housing plus other debt.
What is good debt? Good debt is generally considered any debt that may help you increase your net worth or generate future income. Importantly, it typically has a low interest or annual percentage rate (APR), which our experts say is normally under 6%.
What do lenders consider a good debt-to-income ratio? A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%.
Therefore, the only way to improve your debt ratio is to either reduce your housing expenses, increase your income, reduce your debts, or a combination of these 3 factors. It may be difficult to reduce the cost of rent or mortgage and/or increase your income in the short term.
What is a good long-term debt ratio? A long-term debt ratio of 0.5 or less is considered a good definition to indicate the safety and security of a business.
FHA loans for higher DTI
FHA loans are known for being more lenient with credit and DTI requirements. With a good credit score (580 or higher), you might qualify for an FHA loan with a DTI ratio of up to 50%. This makes FHA loans a popular choice for borrowers with good credit but high debt-to-income ratios.
You may notice slight variations between different lenders' calculations of DTI, but generally, these amounts are considered debt: Monthly housing costs, including a mortgage, insurance, homeowners' association fees and property taxes. Rent payments. Home equity loans or lines of credit.
Key takeaways
Most lenders see DTI ratios of 36% as ideal. Approval with a ratio above 50% is tough. The lower the DTI the better, not just for loan approval but for a better interest rate.