Debt to Income Ratio

Debt to income ratio is a personal measure regarding finance that is used to compare the overall debt of an individual to its overall income. The debt to income ratio is used to measure the ability of an individual to repay the debt taken from any financial institution and the way the individual manages its monthly debt payment. In order to calculate the debt to income ratio is to divide the recurring debt payments with the gross monthly income of the individual. The percentage of this figure is than is calculated and it is expressed in percentage. The example of Debt to income ratio example can be given by assuming that a person pays $1000 as a monthly mortgage payment, he pays $500 for his car loan and $500 for the other debts during each month in a recurrent way. The total recurrent debt payments of the person are $2000 where as the gross income of the person say is $6000. The debt to income ratio can be calculated as under:-

Debt to Income Ratio = 2000/6000 = 0.33 = 33 percent

A low figure of debt to income ratio indicates that there is a good balance between the debt and the income of the individual. A high debt to income ratio indicates that individual is hardly coping up with recurrent debt payments each month. There are a number of different ways of reducing recurrent debt to income ratio and one of them is to increase your gross income and the other way to reduce its total debt.


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