What is debt to Income ratio ? what is the purpose to use this ratio analysis?

Your debt-to-income ratio compares the amount of your debt (excluding your mortgage or rent payment) to your income.

Purpose

Keeping track of your debt-to-income ratio can help you avoid "creeping indebtedness," or the gradual rising of debt. Impulse buying and routine use of credit cards for small, daily purchases can easily result in unmanageable debt. By monitoring your debt-to-income ratio, you can:

• Make sound decisions about buying on credit and taking out loans.
• See the clear benefits of making more than your minimum credit card payments.
• Avoid major credit problems.

  Definition of 'Debt Ratio' A financial ratio that measures the extent of a company’s or consumer’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company’s assets that are financed by debt. The higher this ratio, the more leveraged the company and the greater its financial risk. Debt ratios vary widely across industries, with capital-intensive businesses such as utilities and pipelines having much higher debt ratios than other industries like technology. In the consumer lending and mortgage businesses, debt ratio is defined as the ratio of total debt service obligations to gross annual income.

A personal finance measure that compares an individual’s debt payment to his or her overall income. A debt-to-income ratio (DTI) is one way lenders (including mortgage lenders) measure an individual’s ability to manage monthly payment and repay debts. DTI is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage. For example, John pays $1, each month for his mortgage, $ for his car loan and $ for the rest of his debt each month, so his total recurring monthly debt equals $2, ($1, + $ + $). If John’s gross monthly income is $6,, his DTI would be $2, ÷ $6, =0., or%.

 

 

A debt-to-income ratio is one where lenders measure your ability to manage the payments you make every month to repay the money you have borrowed. 

To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.