What is the debt-to-income ratio (DTI) used for in lending?

• A. It equals monthly debt payments divided by gross monthly income
• B. It measures credit score
• C. It is the annual debt-to-income ratio
• D. It is taxes divided by income

Answer: (A)

Debt-to-income shows how much of your monthly income goes toward debt obligations, and lenders use it to judge whether you can afford a new loan. It’s calculated by taking your total required monthly debt payments (such as loan installments, credit card minimums, car loans, student loans) and dividing them by your gross monthly income (before taxes). The result is a percentage—the smaller the better—because it indicates how much of your income is already spoken for and how much is left to cover a new payment. Lenders rely on this ratio to assess risk and decide both whether to approve a loan and what terms to offer. For example, if you have $1,500 in monthly debt payments and $5,000 in gross monthly income, your DTI is 30%. This measure isn’t about your credit score or taxes; those are separate factors.