Most students are not familiar with financial terms such as “debt-to-income ratio.”
And oftentimes if one is familiar with the term, it is sometimes unclear as to what the ratio is most commonly used for. USF student Bryan Polson guessed that the ratio is the percentage of debt against total income.
“It is probably used for quarter reports, credit demographics and court filings for bankruptcy,” he said.
While these are examples of when debt-to-income ratio does come into play, it mainly factors in when one is applying for a mortgage or a similar kind of loan. It is a percentage that lenders, such as bankers and loan officers, derive to predict how much new debt an applicant can handle.
The ratio can be figured out by anyone. After adding existing debts, such as car, rent or credit card payments, the sum is divided by one’s gross monthly income.
The resulting percentage is the debt-to-income ratio, and this figure represents what portion of one’s income is consumed by monthly debts.
For example, if a student has a car payment of $150, insurance at $80, rent at $320 and other miscellaneous bills of an additional $100, these total together for $650. If this person grosses $900 a month, the $900 would be divided by $650, leaving a debt-to-income ratio of 72 percent.
Some conservative banks will not finance a person with more than 38-percent ratio due to the fact that the individual may not be capable of handling additional debt.
If one is concerned about debt-to-income ratio being too high, the percentage is constantly changing. Diane Muldanado, consumer loan officer for Community Bank of Florida, said this ratio is always in flux.
“If (a person) pays off one large debt, or even many small ones, that changes the whole equation,” she said. “The only time someone really needs to watch it is when purchasing a house or applying for consolidation loans. Sometimes in the latter case, high DTI isn’t even a detriment.”
Although some creditors will finance someone with a debt-to-income ratio of more than 50 percent, the corresponding interest may be high.
The ratio may be irrelevant to many students unless they are looking for a house or other type of loan, but professionals say it can be an advantage to know something about the term and to consolidate previous debt acquired in the past.
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