# What Is an Unsecured Ratio?

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A "reasonable" amount of debt varies from person to person. For example, having \$30,000 in unsecured debt is a red flag if you're only making \$50,000 a year. But, \$50,000 in unsecured debt isn't a problem if you're bringing in \$1 million. To quantify this relationship, lenders use a figure known as the unsecured ratio.

#### Tips

• Your unsecured ratio is an accurate measure of your current financial health. The ratio is defined as the level of unsecured debt you have relative to your annual income level.

## Formula for the Unsecured Ratio

The unsecured ratio equals your unsecured debt divided by your annual income, multiplied by 100, which converts it to a percentage. Your unsecured debt includes any amounts you owe that aren't secured by collateral, such as a house or car, and it includes credit card debt and personal loans. For example, say you carry \$8,000 on your credit cards, \$12,000 in personal loans and your annual income is \$80,000. Divide your total unsecured debt of \$20,000 by \$80,000 to get 0.25. Then, multiply 0.25 by 100 to find your unsecured ratio is 25 percent.

## Significance of the Ratio

Lenders don't like to make additional unsecured loans to people with high existing unsecured ratios because that's tacking on additional debt to someone who's already overextended. Banks often see unsecured ratios of above about 20% as potentially dangerous. When you get above 20 percent, your prospective lender might lower the amount it will lend or require you put up collateral. If you exceed 30 percent, you will likely encounter trouble just getting an unsecured loan, because lenders are concerned you might not be able to pay it back.