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Debt Payments Ratio Formula:
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The Debt Payments Ratio, also known as the Debt-to-Income Ratio, is a personal finance measure that compares an individual's debt payments to their overall income. It's expressed as a percentage and helps lenders and individuals assess financial health and borrowing capacity.
The calculator uses the debt payments ratio formula:
Where:
Explanation: The formula calculates what percentage of your income goes toward debt repayment each month.
Details: Lenders use this ratio to evaluate creditworthiness when considering loan applications. A lower ratio indicates better financial health and greater capacity to take on additional debt. Most lenders prefer a ratio below 36%, with no more than 28% of that going toward mortgage payments.
Tips: Enter your total monthly debt payments and gross monthly income in dollars. Include all debt obligations (mortgage, car loans, credit cards, student loans) and all sources of income before taxes.
Q1: What is considered a good debt-to-income ratio?
A: Generally, a ratio below 36% is considered good, with no more than 28% going toward housing expenses. Ratios above 43% may make it difficult to qualify for new credit.
Q2: Should I use gross or net income for this calculation?
A: Lenders typically use gross income (before taxes) when calculating debt-to-income ratios for loan qualifications.
Q3: What debts should be included in the calculation?
A: Include all recurring monthly debt payments: mortgage/rent, car loans, credit card minimum payments, student loans, personal loans, and any other ongoing debt obligations.
Q4: How often should I calculate my debt-to-income ratio?
A: It's good practice to calculate this ratio annually or whenever your financial situation changes significantly (new job, major purchase, paying off debt).
Q5: Can I improve my debt-to-income ratio?
A: Yes, by either increasing your income, paying down existing debt, or a combination of both. Avoiding new debt also helps improve your ratio over time.