In the context of lending, what does the term "debt-to-income ratio" refer to?

The term "debt-to-income ratio" refers specifically to the percentage of an individual's income that is allocated to servicing their debts. This metric is crucial in assessing a borrower's financial health and ability to manage monthly payments on new loans. A lower debt-to-income ratio indicates a healthier financial situation, as it suggests that a smaller portion of income is consumed by existing debt, thereby leaving more room for additional borrowings or expenses.

For lenders, evaluating this ratio helps them determine the risk of lending to potential borrowers. A higher ratio could indicate that an individual may struggle to meet new financial obligations, making them a less desirable candidate for a loan. Understanding this ratio allows lenders to gauge the balance between a borrower's income and their debts, which is fundamental in making informed lending decisions.