What does the debt to income ratio measure?

The debt to income ratio is a financial metric that specifically measures the proportion of an individual's monthly debt payments in relation to their gross monthly income. This ratio is crucial for lenders as it helps determine a borrower's ability to manage monthly payments and repay debts. A lower debt to income ratio suggests that a person has a manageable level of debt compared to their income, indicating they are more likely to be able to meet their financial obligations.

For example, if someone has a gross monthly income of $4,000 and total monthly debt payments of $1,200, their debt to income ratio would be 30% (1,200 divided by 4,000). This information is vital during financial assessments, such as applying for loans or credit, as it reflects financial health and stability.