What does "debt-to-income ratio" measure?

The debt-to-income ratio is a financial measure that provides insight into an individual's ability to manage monthly debt obligations relative to their income. Specifically, it quantifies the percentage of gross monthly income that a person allocates towards paying off debts, which include loans, credit card payments, and other financial obligations.

This ratio is important because it helps lenders assess the risk associated with granting loans or credit. A lower percentage typically indicates better financial health, suggesting that the individual has a manageable level of debt compared to their earnings, while a higher percentage may signal potential financial strain or difficulty in meeting payment obligations.

The other options focus on aspects of debt or income but do not accurately define the debt-to-income ratio. For instance, one option discusses the total amount of debt relative to income without mentioning the aspect of monthly payments, while another references savings rather than debt. Another suggests a measure of discretionary income, which is unrelated to the debt-to-income relationship. Thus, the emphasis on the percentage of gross monthly income directed towards servicing debts is what defines the debt-to-income ratio, making it a critical metric in financial assessments.