How to tell whether a debt is sustainable

Debt is not automatically a problem. It can help you buy a home, finance a car needed for work, support an investment or spread a major expense over time. Problems arise when repayments absorb too much income, when debt is systematically used to cover everyday expenses, or when even a small unexpected event makes meeting deadlines difficult. Understanding whether a debt is sustainable therefore requires more than asking whether you can afford today's instalment. You need to understand whether that instalment can also be paid regularly over the coming years without compromising essential expenses, saving and the ability to handle unexpected events.

The Bank of Italy uses precisely this approach in its financial education materials: a loan's sustainability depends on the ability to make repayments over time, taking account of income, recurring expenses, existing debts and possible unexpected events. As a general practical guideline, it suggests avoiding total repayments above approximately 30% of stable net income.

Paying an instalment does not necessarily mean you can afford it

Imagine someone with monthly net income of 2,000 euros and an instalment of 600 euros. The instalment represents 30% of income and might seem sustainable. But the percentage alone does not tell us enough. If that person lives with their parents and has few other expenses, they may have considerable financial headroom. If instead they pay 900 euros in rent, support a child, spend 250 euros on their car and have no emergency fund, the same 600-euro instalment can become very difficult to sustain.

The assessment must therefore start not just with income, but with income available after essential expenses. Debt is sustainable when, after repayments, enough money remains to live normally, absorb unexpected events and maintain at least some ability to save. If paying the instalment means ending every month close to zero, the debt may technically be payable but financially fragile.

The 30% rule is useful, but it is not a law

The Bank of Italy generally considers it reasonable for an instalment not to exceed approximately one-third of disposable income and, discussing loans more broadly, suggests 30% of stable net income as a practical benchmark. However, the Bank of Italy itself specifies that all existing repayments must be considered, not just the new loan.

Suppose a household has stable net income of 3,000 euros a month. 30% corresponds to 900 euros. If it already pays a car instalment of 250 euros and a personal loan instalment of 150 euros, the new loan should not be assessed as though those debts did not exist. With a new instalment of 600 euros, the total monthly outlay would become:

or approximately 33.3% of net income.

Even apparently small debts can therefore add up and significantly change overall sustainability. The Bank of Italy explicitly highlights this risk when discussing over-indebtedness: the assessment must include all existing loan instalments, because even small ones can affect repayment capacity.

The 30% threshold should nevertheless be interpreted as a prudential indicator, not a guarantee. A household with net monthly income of 10,000 euros can probably sustain a higher percentage without compromising essential expenses. A household receiving 1,500 euros and facing high unavoidable costs could instead struggle even below 30%.

Use stable income, not the best possible income

A frequent mistake is to calculate sustainability using all income received during a year, including amounts that are not guaranteed. Bonuses, performance payments, overtime and occasional fees can make income appear higher than can realistically be predicted over the long term.

The Bank of Italy explicitly suggests referring to stable net income, therefore excluding exceptional components such as bonuses and overtime.

Imagine someone receiving 1,800 euros net a month but often reaching 2,200 euros through overtime. If they arrange a loan around 2,200 euros, they could struggle as soon as overtime declines. A prudent debt assessment should primarily start from the more predictable 1,800 euros.

The same reasoning is even more important for a self-employed person. In this case, simply taking the best month or dividing the latest annual income by twelve is not enough. It is preferable to examine several years, consider revenue variability, taxes payable and any periods when turnover falls.

The real indicator is what remains after the instalment

A very simple way to assess sustainability is to build a monthly budget.

Suppose we have:

If a new instalment of 400 euros were added, only 250 euros a month would remain. The new instalment would equal 16% of income, apparently well below the indicative 30% limit, but actual headroom would be extremely limited.

This example shows why percentages must always be considered alongside the household budget.

A useful personal indicator can be:

The smaller this margin, the greater the vulnerability.

Sustainable debt must withstand unexpected events too

Sustainability should not be assessed only under normal conditions. You need to ask what would happen if something went wrong.

For example:

• if income fell by 15%;
• if utility bills increased;
• if medical expenditure became necessary;
• if the car needed a major repair;
• if one source of household income disappeared for several months.

A household that can pay every instalment only while nothing unexpected happens is financially fragile.

This is why debt should be analysed together with the emergency fund. A relatively high instalment can be more manageable if sufficient reserves exist to cover several months of expenses, while a lower instalment can become dangerous if there is no safety margin.

A longer term can lower the instalment without making the debt cheaper

When an instalment seems too high, one of the most common solutions is to extend the loan term. This does reduce the monthly outlay, but does not mean the debt becomes less expensive.

The Bank of Italy notes that, for the same principal and rate, extending the term lowers the instalment but increases total interest paid.

Consider a purely illustrative example. A loan of 20,000 euros might be repaid over five years with a relatively high instalment, or over ten years with a much smaller one. In the second case, monthly affordability improves, but the capital remains subject to interest for twice as long.

This introduces an important distinction:

A loan can have an easily payable instalment yet be very expensive overall.

This is why, beyond the instalment, you should always examine the APR (TAEG), the annual percentage rate of charge, which summarises the overall cost of credit, including interest and many other compulsory costs associated with the loan.

The interest rate matters more than it seems

Two loans with the same principal and term can have very different costs depending on the rate applied. This is particularly evident in consumer credit, which generally carries higher rates than residential mortgages.

In its Financial Stability Report published in 2026, the Bank of Italy noted that the overall cost of consumer credit stood at around 10.3% in February, although it had declined slightly from the peak reached in 2025.

This figure does not mean every consumer loan costs 10.3%, because terms depend on the product, duration, customer and intermediary. However, it shows how expensive financing consumption through debt can be.

A loan must therefore be assessed by asking not only “can I pay 200 euros a month?” but also “how much am I paying overall to obtain this money today?”.

Debt used for consumption differs from debt used to acquire an asset

Not all debts serve the same economic function.

A mortgage used to purchase a home simultaneously enables the acquisition of an asset. Each repayment of principal increases the portion of the property's value effectively owned.

A loan used to purchase something that loses value rapidly, as many consumer goods do, creates a different situation: the debt can remain for years while the item's value declines.

Debt used to finance ordinary consumption, such as holidays, restaurants, clothing or everyday expenses, is more delicate still. If a household must systematically borrow to maintain its lifestyle, the problem is not just the loan: it means recurring outgoings exceed income.

This does not automatically make all consumer credit wrong, but it completely changes the risk assessment.

Watch the combined effect of small debts

An instalment of 40 euros may seem irrelevant. A second instalment of 70 euros may also seem manageable. The same applies to a purchase in four instalments of 100 euros. The problem is that a series of small loans can become a significant monthly commitment without the person immediately realising it.

This phenomenon has become particularly relevant with Buy Now Pay Later, systems that allow immediate purchases with payment later, often in a small number of instalments.

The Bank of Italy draws attention to the growing use of BNPL and the risks it can create when several small payment commitments accumulate. The problem is not necessarily an individual instalment, but the cumulative impact on the budget, particularly for people with limited income or assets and other existing debts.

The problem is not necessarily an individual instalment payment, but the simultaneous accumulation of many obligations. An instalment of 50 euros may be negligible; ten instalments of 50 euros become 500 euros a month.

Debt can become unsustainable after it is taken out

Sustainability is not a permanent characteristic. Someone may take out a loan in perfectly sound financial circumstances and find themselves in difficulty a few years later.

Income may fall, household expenses may rise, a child may be born, a separation may occur, or interest rates may increase if the loan has a variable rate.

The Bank of Italy therefore stresses that sustainability must be assessed both before entering into the contract and throughout the loan's life, because the borrower's financial circumstances can change.

It is therefore useful to periodically monitor the burden of repayments relative to income, rather than treating borrowing as a decision to assess only when signing.

When debt starts becoming a problem

Some warning signs deserve careful attention. One of the clearest is using new debt to pay previous debt. Taking out financing to cover another loan's instalments means the normal income stream is no longer sufficient to meet commitments.

Other signs may include systematic use of an overdraft, frequent reliance on revolving credit cards, late instalment payments, a complete absence of saving for many months, or having to postpone essential expenses to meet financial deadlines.

Over-indebtedness is a situation in which debts can no longer be repaid regularly using available and reasonably foreseeable resources.

The aim should therefore be to intervene long before reaching this situation.

A bank's creditworthiness assessment and personal sustainability do not perfectly coincide

When a loan is requested, the intermediary assesses creditworthiness: the likelihood that the customer can repay the loan. It analyses income, financial circumstances, other debts and information held in credit databases.

However, a bank granting a loan does not necessarily mean that debt is ideal for your personal budget.

The bank must establish whether the credit can reasonably be repaid. The consumer should ask a broader question: even if I can pay the instalment, do I really want to allocate that portion of my income to this purchase for the next five, ten or twenty years?

This distinction matters. The technical ability to borrow is not the same as the economic wisdom of doing so.

A simple test before taking on new debt

Before taking out a loan, a very simple simulation can be useful. Imagine someone with stable monthly net income of 2,700 euros, essential expenses of 1,500 euros, existing instalments of 250 euros and a proposed new instalment of 450 euros.

Total instalments would be:

The instalment-to-income ratio would be:

Below the indicative 30% benchmark.

However, headroom after essential expenses and debts would be:

You then need to ask whether 500 euros is enough for non-essential spending, saving and unexpected events.

You can then perform a stress test assuming a 10% reduction in income. Income would become 2,430 euros and headroom would fall to:

The debt remains payable, but the situation would become much more fragile.

Running this type of simulation before signing can be more useful than looking only at the instalment.

Sustainable debt should leave room for saving

A household able to pay all instalments regularly but no longer set anything aside may be in balance, yet have little ability to absorb new shocks.

Ideally, the budget should allow at least some capacity to save alongside expenses and debts. There is no universal percentage to set aside: it depends on income, objectives, age and family circumstances. But if debt service completely removes any possibility of building reserves, sustainability deserves a more cautious assessment.

The reason is simple: debt currently paid through a perfectly balanced budget can become problematic as soon as an unexpected expense appears.

Is repaying debt early always worthwhile?

This question has no universal answer either. Repaying a loan early normally reduces future interest and can improve monthly headroom, but requires an immediate use of capital.

If all savings are used to clear a debt, leaving no emergency fund, a subsequent unexpected event could force you to take out a new loan.

You therefore need to compare the actual cost of the debt, available liquidity, any repayment costs or conditions, and possible alternatives. A very expensive loan normally deserves greater attention than a debt with a very low interest rate.

Here too, the rate is not the only consideration: the entire financial structure matters.

Conclusion

Understanding whether debt is sustainable requires much more than checking whether there is enough money in the account for the next instalment. You need to examine the burden of all instalments on stable income, essential expenses still to be covered, the margin remaining each month, the emergency fund available and what would happen if income fell.

The indicative 30% rule suggested by the Bank of Italy is a good initial check, but does not replace analysis of your own budget. An instalment below 30% may still be too burdensome for a household with high expenses, while in other circumstances a different percentage may be manageable.

The most useful question is therefore not:

“Will the bank grant me this loan?”

Nor is it:

“Can I pay this instalment?”

The question should be:

“After paying this instalment, does my budget remain sufficiently robust to let me live, save and handle an unexpected event without taking on more debt?”

If the answer depends on everything continuing to go perfectly for many years, the debt is probably more fragile than it seems.