Debt-to-Income Ratio (DTI)
The Debt-to-Income Ratio (DTI) is a personal finance metric that compares an individual’s total monthly debt payments to their gross monthly income. Lenders use the DTI ratio to assess an individual’s ability to manage and repay debt. A lower DTI ratio indicates better financial health and a greater ability to take on additional debt, while a higher DTI ratio suggests potential difficulties in managing debt payments.
Example
If an individual has $1,500 in monthly debt payments and a gross monthly income of $5,000, their DTI ratio is 30%, meaning 30% of their income goes toward debt repayment.
Key points
• DTI measures the percentage of income used for debt payments, reflecting an individual’s financial health.
• A lower DTI ratio indicates better ability to manage debt and qualify for loans.
• Lenders use DTI to assess a borrower’s creditworthiness and risk.
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