Poll: What’s the largest debt load you’re comfortable with?

Please vote in this poll using the sidebar.

What's the largest debt load you're comfortable with?

  • Less than 20% of gross income. (42%, 87 Votes)
  • 20% up to 25% of gross income. (24%, 49 Votes)
  • 25% up to 30% of gross income. (18%, 36 Votes)
  • 30% up to 35% of gross income. (8%, 16 Votes)
  • 35% of gross income or more. (8%, 17 Votes)

Total Voters: 205


This poll will be active and displayed on the sidebar through 03.14.2009.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

13 comments:

  1. 1
    Eric Arrr says:

    Well, what /kind/ of debt?

    The 0.0% promotional APR kind, or the 15% standard APR kind?

    The 5% APR auto loan on a new car at MSRP kind, or the 5% APR on a 20-year-old classic kind?

    The 500k at 5% on a 510k condo in 2007 kind, or … ?

  2. 2
    Jeff says:

    Having come back from a significant debt load in the past, the real question I have is about comparisons and affordability: I’d love a low debt load, and co-workers who purchased condos 7- or 10- years ago have that. But even if I purchased in today’s market, my monthly costs would be 2.5-3X theirs.

  3. 3
    Nick says:

    Not sure if this is the intended way to be thinking about the question, but personally I’d be comfortable with a debt load well in excess of 35% of my gross income under very specific circumstances. For example, if I have a very low interest loan, where I’m earning secured interest on the principle of which is greater than the interest on the loan: I would carry as high of a loan balance as possible in that circumstance. Interestingly, there are loans approaching that right now, if you meet certain qualifications for government-subsidized loans, and you can find the right deal.

    Under normal circumstances I would probably go 25-30, but under the right circumstances much higher; it just depends on the numbers.

  4. 4
    DaveyDave says:

    Over time, I’ve become extremely risk averse much like many of the others on the blog. I have zero debt and no credit cards — only use cash or debit. I understand this has credit rating implications and other potential difficulties. But this only comes on the heels of learning hard life lessons. I suspect others are learning similar lessons now and perhaps as a nation, our debt aversion will increase accordingly.

    It’s difficult to have peace of mind with debt, no? Of course I’ll have to borrow some for a house, but it mostly will be a cash deal only due to being a saver, not because of being a high income earner. This is in spite of the wonderful tax deduction incentives provided by our thoughtful government! heh.

  5. 5
    Mike2 says:

    In the current economy, less than 15%. As it stands, under 5% is all I’ve comitted to.

  6. 6
    WestSideBilly says:

    Not sure about this question… Credit card debt, auto loans, and mortgages (the 3 biggest forms of debt for most people) vary. And rent, even though it isn’t debt, is a contractual obligation not a lot different from a mortgage. What is the poll getting at? How big of a mortgage would I be comfortable with?

  7. 7
    Ben says:

    To me, debt load is important. But it would be unacceptable to be in a position where I owe more on an asset than I get for it. I did it once with a car, and paying money to get rid of it made me approach cars very differently (ie put a lot of money down).

    I got an email from an area builder today, and what is interesting is that they are actually asking people what price points they are after and what is keeping people on the fence. It is interesting to me because up until now all builders seemed to be in denial about market conditions. I would love to see what the data is that they get, but I doubt that they will make this data public.

    I wonder if some builders will try to figure out a way to decrease depreciation fears amongst prospective buyers. The right assurances with regards to this would probably make me much more serious.

  8. 8
    Nick says:

    RE: Ben @ 7

    Sorta OT to the original poll, but I’d guess depreciation anticipation is the #1 enemy of builders and selling RE agents alike. Everybody is looking for a way to convince potential buyers that you cannot predict if values are going to go up or down in the short to medium term, when the reality is that you really can make a fairly educated guess as to the anticipated change in values. In fact, with the government helping delay foreclosures, propping up insolvent banks in the short-term (which allows them to defer foreclosing on non-performing loans), and all the alt-a “time-bomb” loans with fixed explosion times, coupled with the economic situation and the lack of support for private-sector employment or non-government industry, I’d posit that you could be pretty damn sure what direction housing prices are going to trend in the short to medium term.

    Economists often mention the unintended consequences of macro economic actions, and I’d postulate that almost everything the government is doing in response to the housing bubble bursting is building a gigantic tidal wave of expected depreciation, and that is probably one of those effects which was not very well thought out. If only the people in charge could realize and/or admit that building the expectation of devaluation (housing, companies, retirement, etc.) into the system was doing more harm than all the “good” that all the half-baked schemes to reflate the bubble are doing, we might see some real productive progress at fixing the underlying problems. As it stands, though, it’s going to be a rough next few years for builders, RE agents, and anyone who derives their income from housing sales (to be fair, it’ll be rough for everyone, and probably for a decade or more, but even more so for people in the housing industry).

  9. 9
    DrShort says:

    It depends on what the debt is financing.

    0% for food, clothes, vacations.

    3 – 5% for a car

    10% for an education

    20 – 25% for a home

    Total not to exceed 25 – 28%

  10. 10
    Scotsman says:

    It’s funny how acceptable debt has become. From an economic perspective, the only debt that can be justified is that used to purchase an income producing asset so that the debt will be self liquidating, that is, comes with its own income stream to make the payments. For example, buying a business or an income property. All other debt simply allows future purchases to be made in the present, but at the of cost reduced future consumption. By paying the interest expense or premium we can have “it” now, but will have less to spend in the future. So, debt effectively reduces our total consumption. We could all have more over our lifetimes if we only delayed purchases into the future until they could be paid for with cash.

    For example, you can buy a $20,000 car now for 72 payments of $370 and a total outlay of about $26,700, or wait only five years saving the same payment and investing it and buy the same car for $6,700 less. The difference is a European vacation… or two. But very few have the patience to defer and reap the benefits.

    Interest can compound for you, or against you, and over time exponential functions can lead to huge gains or losses. But one needs to get started on the right side (saving) of the equation to have it work for you, not the debt side. We all know there are exceptions and other considerations besides maximizing lifetime consumption, but it important to remember all debt comes with a cost.

    No debt and money in the bank is freedom- freedom to walk from a job you don’t like, freedom to take risks, and maybe most importantly the freedom to let your heart make those important life decisions, not your wallet.

  11. 11
    wreckingbull says:

    RE: DaveyDave @ 4 – I used to do the same, until I learned of horror stories about banks not reimbursing debit card holders for fraudulent activity, since they are PIN-based. The defense of the bank is that since they are PIN-based, the fraud must have resulted from the holder’s mis-management of the PIN. Apparently they are not covered under the same set of laws as credit cards, which I believe limit your liability at $50.

    I now just use a single credit card, to benefit from the consumer protection aspect. The added bonus is that I get about $100/year cash-back. Something to consider.

  12. 12
    DaveyDave says:

    RE: wreckingbull @ 11 – You’re right about the risks of debit cards and I have definitely considered getting the lone credit card for big purchases like hotels, air fares, internet items, etc. That would be an intelligent thing to do and not a big risk. There is just *something* inside of me that hates making payments on credit cards and it’s not entirely rational — even ones on time with no penalty/interest involved. I’d have to throw that into a ‘my problem’ category.

    And Scotsman — you’re singing the gospel about interest. It can either be your friend or enemy… No or little debt most definitely equates to a sense of freedom. With significant debt, our jobs are much more like indentured servitude. Your point about acquiring debt as a means of investment for future return is a critical one. Acquiring debt as a means of buying ‘stuff’ is perhaps not the best decision.

    If we spend enough to get reasonable housing, food, clothes, cars, entertainment, etc. — it really doesn’t add up to that much if we’re careful. It only then becomes a question of how good of a car or other items. That’s when the real money/debt begins to add up. I mean, having a Lexus would be nice, but I’d rather have a VW and the balance in cash…

  13. 13
    Ben says:

    I think that there is a big difference between the use of credit for a business and the use of personal credit.

    In a business a wise capital investment made at the right time can pay serious dividends, well in excess of the cost of the original capital. But if you think of the day zero desert island economy you realize that credit cannot be extended from thin air – you cannot lend what does not exist.

    Personal credit is paying your money to have things before you can afford them or paying somebody to not hold your money in assets. It is rarely a capital investment, except for rare conditions or semantics. But cheap credit gives a better quality of life to people. Somebody can borrow money for a car, and have the use of the car before they have saved for it.

    Credit will probably destroy the USA before long. It will be the lead in the pipes that brings the country down. I say this because too much easy credit makes people forget that production is required. At the highest levels of government the basic premise that production must occur to create capital is forgotten or ignored. It creates a laziness which I think is similar to that of communism. With communism, people don’t work hard because it will not benefit them personally. With credit, people can get money without working so they don’t work hard.

    The major strength of the USA is its currency. If the US dollar tanks then everybody in the country becomes poor overnight and clawing your way back out will be very hard. There will be plenty of jobs though because everybody will want to buy cheap American goods. I think that this risk is real.

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