What is the purpose of the debt-to-income ratio?

The debt-to-income ratio is a key financial metric used to assess a borrower's ability to manage their monthly debt payments in relation to their income. This ratio is calculated by dividing total monthly debt payments by gross monthly income, resulting in a percentage that indicates how much of a person's income is consumed by debt obligations.

This measure is particularly important for lenders when evaluating loan applications, as it helps determine the risk associated with lending to a borrower. A lower debt-to-income ratio suggests that a borrower has a manageable level of debt compared to their income, making them a more favorable candidate for loans, while a higher ratio can indicate financial strain and a greater risk to the lender.

In contrast, the other options focus on different aspects of personal finance. For instance, calculating total assets relates to a person's wealth rather than their capacity to manage debt payments. A credit score reflects an individual's credit history rather than their income versus debt obligations. Evaluating investment returns is concerned with profitability on investments rather than the borrower's ability to handle existing debt. Thus, the primary function of the debt-to-income ratio indeed revolves around assessing a borrower's financial health concerning debt management.