What does the debt-to-income ratio (DTI) measure?

The debt-to-income ratio (DTI) specifically measures the percentage of an individual's income that is allocated towards debt payments. This financial metric is crucial for assessing a person's ability to manage monthly debt obligations in relation to their overall income. Lenders often use the DTI to determine an individual's borrowing capacity, as a lower ratio indicates a healthier balance between income and debt, making it easier for individuals to handle additional financial responsibilities.

For instance, if someone earns $4,000 a month and has $1,200 in monthly debt payments, their DTI would be 30%. This means that 30% of their income is going towards paying off debts, which would typically be seen as manageable by most lenders. Therefore, a lower DTI is generally favorable, reflecting a more secure financial situation.

The other choices do not accurately reflect what DTI measures. Personal savings compared to monthly expenses focuses on different financial health aspects. The total income earned over a year pertains to annual income but does not account for the debts incurred. Lastly, the relationship between assets and liabilities relates to net worth, which is another financial concept but not directly tied to how income is used to service debt.