The Debt-to-Income (DTI) ratio compares a borrower’s total monthly debt payments to their gross monthly income. It is used worldwide by lenders to measure a borrower’s ability to manage debt and repay loans.
How It’s Calculated
DTI = (Total monthly debt payments ÷ Gross monthly income) × 100. This includes mortgage or rent, credit cards, student loans, car loans, and any other recurring debts. A lower DTI indicates better financial stability and borrowing capacity.
Why It Matters
- For lenders: Shows whether a borrower is likely to keep up with all debt obligations.
- For borrowers: Helps identify how much of their income is committed to debt and whether they can safely take on more.
Final Thoughts
The DTI ratio is a crucial tool in personal finance and lending decisions. Keeping it low improves borrowing options and reduces financial stress, while a high DTI can signal risk to both lenders and borrowers.