What does “debt-to-income ratio” mean?

The term “debt-to-income ratio” refers to the percentage of a consumer's monthly income that goes towards paying debts, making it an important metric for both consumers and lenders. This ratio is calculated by taking the total monthly debt payments (which may include mortgages, credit card payments, student loans, etc.) and dividing it by the consumer’s gross monthly income.

A lower debt-to-income ratio is generally preferred as it indicates that a consumer is not overly burdened by debt and has a greater ability to manage existing obligations while still having disposable income for other expenses. It is a key factor in assessing an individual’s financial health and borrowing capacity, particularly in the context of loan approvals and credit decisions.

Other options, while related to financial assessment, do not accurately describe the debt-to-income ratio. For example, one option suggests it refers to the amount of debt a consumer can acquire, which misses the aspect of income relative to that debt. Another option brings in total assets, which is a different financial measure. The last option introduces a concept of savings versus spending, further diverging from the focus on debt relative to income.