DemandTeq: Your source for cutting-edge technology news and trends

It is important to keep your economics under control and one of the metrics in doing so is the debt to income ratio. The debt to income ratio measures the relationship between a borrower’s gross earnings in a given period and their gross obligations to service debt in that same period. Lenders particularly wish to ascertain the ratio in order to gauge the risks covered by their monthly servicing abilities and debt exposures. As various ratios reach a certain level, credit or loans should then be extended to the borrowers, here are steps of calculating the debt-ratio.

Understand What The Debt To Income Ratio Is And How It Is Utilized

In simple English, the DTI debt-to-income ratio defines a proportion of your monthly debt obligations against your monthly gross income. The percentage will be low forcing you to be less of a risk to lenders which in turn increases your chances to get credit approvals.

Calculate Your Total Monthly Debt Payments

For you to calculate DTI, the first step is calculating all monthly debt obligations. This will include:

Other Obligations: In these sections, add any other obligations such as personal loans to friends, child maintenance and divorce settlements.

For example, $1,500 may be the monthly payment amount on your mortgage, $300 for your car loan, $200 for student loans, and $100 for credit card bills, which will result to a total of $2,100 in indra payments for the month.

Establish Your Gross Salary

Going on, work out your gross salary which means the total salary before taxation. A Gross Salary also includes:

Basic Salary: If the person is on salary, take the annual Salary and simply divide it by twelve.

Other Earnings: This could be any additional pay including any positive feedback.

Self-Employment Income: Depending on how you earn, assess the mean monthly expenditure.

Other Income: Include other sources of income such as rent or revenue gained from investments.

As an example, someone who earns $60,000 a year would be earning generally $5,000 a month before tax and other implications.

Work Out Your Debt-to-Income Ratio

Then you divide total monthly debts of repayment by the gross monthly salary. To get a percentage on the result you obtained, multiply it by one hundred.

Formula: Debt-to-Income Ratio = Total Monthly Debt Payments Gross Monthly Income for Total Monthly Debt Payments × 100. Debt-to-Income Ratio=( Gross Monthly Income Total Monthly Debt Payments ​ )×100 Utilising the example above:

DTI Ratio=( )×100 = 42 DTI Ratio=( )×100=42% This simply tells one that 42% of his/her earnings in a month are used to settle debts.

Results Evaluation Your DTI ratio gives the lender an idea of how stable your finances are. In general, a DTI ratio of: The Findings 35% or less: This is good. It shows that one earns as much as he or she spends and even has room for more borrowings. 36% to 49%: This range indicates you are probably in control with your debt, however there is some level of concern if you are planning to borrow more. 50%+ This means your debt exceeds your income going by the measures in this range and taking new loans or credits will be an uphill task.

Tips to address factors that favor raising your DTI Ratio Over the Counter Debt For such an income range, if the DTI fraction is more than what is considered at the desirable DTI fraction will overstatements on these issues consider these stages to minimize it: It has been mentioned earlier that start from the guidelines focusing on the core principles of fast getting over the counter debt from creditors.

Increase Income: Engage in activities in which you can earn extra income, for instance a part time job or a freelance job.

Avoid New Debt: If your DTI ratio is poor do not add any new debts.

Why Your DTI Ratio Matters

Your DTI ratio is directly proportional to your financial well-being. Lenders look at the debts you have in relation to income, how close the two figures are to each other. The lower the DTI ratio, the better your chances of being sold credit and on whose terms. So you have to keep figuring out your DTI ratio in order not to mess with your finances and be careful about the proportions of your debt to income. Once you learn how debt-to-income ratio is computed and make sure you stay in some limits, it is possible to influence your future positively and move closer to debt elimination.

Subscribe to our Demandteq Newsletter: http://demandteq.com/subscribe/