A debt-income-ratio (DTI) is a ratio that shows what percentage of income is going toward the debt.
Gross monthly income is the income before tax.
This ratio is an important indicator of your ability to pay the interest on the loan and still have enough income available for your basic needs.
It also shows how much loan you are able to afford. By looking at your total expenses, the lender can also gauge how responsible you are in spending your money.
The ratio can be calculated as follows:
For example, let’s say your income is $10,000 per month and the expenses are $2,000 per month. Then your DTI is $2,000/$10,000 = 0.5 * 100 = 50%
A lower DTI is better for you as a whole from a financial management standpoint.
Being responsible by borrowing money and spending it only when needed would help you keep this ratio lower.
It helps when you really need to borrow money, let’s say for a business loan or for a real estate loan.
Generally speaking, you want your DTI to be < 25%. If that is not the case, then don’t panic. Create a financial plan to pay off your debt and work towards reducing your DTI.
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