QUESTION: What is debt-to-income ratio (DTI) and how to calculate it?

The debt-to-income ratio, or DTI, is a key financial metric that reflects the ratio of total monthly credit and loan obligations to a person's aggregate regular income. This tool is actively used by lending institutions to assess the creditworthiness of clients, as well as by individuals themselves to control their own budgets and prevent potential default situations.

To calculate this metric independently, it is necessary to use a special formula. First, you should sum up all current mandatory payments for existing loans, mortgages, auto loans, credit cards, and microloans. The resulting amount is divided by the total net monthly income of the family or a specific person, after which the result is multiplied by one hundred percent to obtain the final value as a percentage.

When assessing the resulting outcome, financial experts and banks rely on generally accepted safety standards. The lower the final percentage, the higher the chances of approval for a new loan and the safer the borrower's financial position. It is considered that a comfortable level of debt load does not exceed thirty percent, a moderate level is in the range of up to fifty percent, and exceeding this threshold significantly increases the risks of financial difficulties.

In real life, knowing your DTI helps you stop in time before taking out new loans. If the calculations show a critical approach to the danger line, you should review your expenses, give up spontaneous purchases, or consider the option of refinancing existing loans. This will allow you to combine several small payments into one with a longer term and a lower monthly burden on the family budget.