How Much Debt Is Too Much Debt?

Devin Halim Wijaya8 May 2025

0 0 4 minutes read

Many people believe that debt is an essential component of contemporary life. We can accomplish goals that might otherwise be unattainable by borrowing money whether it be through business financing, credit cards, mortgages or student loans. But at what point does beneficial debt become a financial trap?The Quran forbids reckless borrowing and extravagant spending. As the evidence Surah Al-Isra verse 26-27 said:

“And do not spend wastefully. Indeed, the wasteful are brothers of the devils, and ever has Satan been to his Lord ungrateful.”
(Qur’an, Surah Al-Isra, 17:26–27)

The significance of financial discipline is emphasized in this verse. Effective debt management is not only a financial obligation it is also an ethical one.

Also read:Solvency Ratios: Can Your Business Pay Off Future Debts?

When Debt Gets Out of Control

A universal monetary threshold for too much debt does not exist. Rather it is contingent upon earnings outlays and overall financial well-being. The debt-to-income ratio (DTI) is one of the most widely used metrics to determine whether you have too much debt. The Consumer Financial Protection Bureau states that a DTI of more than 43 percent could be a warning sign and prevent a person from being eligible for a mortgage. A DTI of less than 36 percent is typically regarded as manageable. There is a warning zone between 36 and 49 percent where repayment may begin to put a strain on your finances. A red flag is when your debt-to-income ratio (DTI) is 50 percent or higher meaning that over half of your income is being used to pay off debt leaving little left over for savings or emergencies. Using credit card to pay for basic expenses another clear sign that your debt is getting out of control. When someone uses credit cards to pay for groceries utilities or rent and is unable to make monthly payments it is an obvious indication of financial distress.

Also read:Liquidity Ratio: Can Your Business Pay Short-Term Debt?

Debts Psychological Cost

Debt has actual psychological effects beyond the numbers. Chronic stress, anxiety, insomnia and even depression can be brought on by high debt levels. People who are in debt frequently report being less focused and productive at work which leads to a vicious cycle that makes financial recovery more difficult.

Young adults are especially at risk because they frequently accrue debt as a result of social pressures ,lack of financial literacy or the pervasive use of buy now pay later plans. Early financial literacy and the development of habits that avoid needless borrowing and foster long-term stability are crucial.

Also read:What to Do When Receiving a Pay Rise: How to Use it to Reach Financial Freedom

The Good Debt vs Bad Debt

Not all debt is detrimental. Borrowing for investments like real estate or education that are anticipated to increase in value or yield income is generally considered good debt. These loans frequently offer low interest or margin rates as well as the possibility of long-term financial gains. Conversely high-interest or margin borrowing for transient or depreciating expenses—like luxuries, gadgets or needless travels—is typically referred to as bad debt. Even good debt can become hazardous if your payments begin to outweigh your income or if borrowing turns into a habit rather than a tool.

Methods for Maintaining Control

It takes awareness, preparation and discipline to avoid debt problems. Tracking your income and expenses on a regular basis will help you understand where your money is going each month. This makes it easier to spot areas for improvement and wasteful spending. Its important to refrain from impulsive purchases particularly when using credit. Small expenses are simple to justify but they can quickly mount up and put you in debt. The establishment of an emergency savings fund is another crucial tactic that enables you to deal with unforeseen costs without taking out loans. Its important to use credit cards sensibly. Paying off your entire balance each month will help you keep your credit score high and prevent interest from accruing.

Also read:The Prohibition of Extravagant Life in Islam

Refrain from taking out loans for non-essential lifestyle upgrades and only borrow or finance what you actually need. Predictability and budgeting can also be aided by selecting loans with fixed interest or margin rates. Although making minimum payments may seem like a relief they actually lengthen your debt and raise your overall interest expenses. If you’re already managing several debts and financings think about consolidating or negotiating better terms to streamline payments and possibly lower interest. Never be afraid to ask a trusted financial advisor for advice if you’re feeling overwhelmed or unsure of where to start.

Finally put in the time to learn about personal finance. Your approach to budgeting can significantly change if you comprehend how debt operates how interest accrues and the dangers of making late payments.

In conclusion

It is how debt is handled not its very existence that makes it problematic. Depending on whether you are in control of it or it is controlling you it can be either a tool or a trap. Never use debt to finance an unsustainable lifestyle be truthful about your financial status and manage your DTI. Discipline and moderation are essential as they are for many things. Wastefulness and excess lead us astray as the Quran reminds us. One aspect of leading a balanced moral life is effectively managing debt.