What does debt-to-income ratio measure?

The debt-to-income ratio measures the percentage of a person's income that goes towards paying debts. This financial metric is crucial for lenders when assessing an individual's ability to manage monthly payments and repay borrowed funds. A higher debt-to-income ratio can indicate that a person may be over-leveraged, potentially making it more challenging to take on additional debt or qualify for loans.

In evaluating personal finances, understanding the debt-to-income ratio helps individuals make informed decisions about their financial health, budgeting, and future borrowing possibilities. By focusing on how much of their income is allocated to servicing debts, individuals can better manage their financial obligations and work towards maintaining a sustainable financial lifestyle.

The other options do not accurately reflect the definition. The concept of savings relates to how a person's income is allocated toward building their financial future rather than paying existing debts. The total income earned each month provides a broader picture of financial resources but does not specifically address obligations. Lastly, the value of assets owned is about what one possesses rather than how income relates to debt obligations. Understanding the debt-to-income ratio is vital for anyone looking to navigate financial decisions effectively.