Question

How and when would debt-to-income ratios be used in the credit approval process? Explain at least one of these ratios and how it is calculated.

Answer 1

Debt-to-income ratio is ratio which is provide details to banker or lender whether an individual can be provided loan or financing.

Debt to income ratio take all monthly expenses like, rent, current loans , credit card bill etc.. and divide this amount by gross monthly income. This ratio will provide lender a ratio that what % of income is being currntly spend and so that what amount of money can be further financed to individual. Further, whether a particular % of debt to income is good of bad depend upon company to company.

example of debt-to-income ratio = Lets say X is currently  paing 4000 on rent, $2000 on car loans and $1,4000 in rent, his total monthly debt is = $20,000. If he earn lets say $50,000 per month, his debt to income ratio = 20000/50000 = 40%