What does the debt-to-income ratio measure?

The debt-to-income ratio is a crucial financial metric that evaluates an individual's ability to manage monthly debt payments relative to their overall income. Specifically, it compares the total monthly debt obligations—such as mortgage payments, car loans, credit card payments, and any other recurring debt payments—to the gross monthly income received before taxes and deductions. This ratio is expressed as a percentage and is widely used by lenders to assess the risk involved in lending money to borrowers. A lower debt-to-income ratio typically indicates better financial health and greater capacity to take on additional debt.

In contrast, the other options do not accurately describe the debt-to-income ratio. The first option refers to a different financial concept, which is the ratio of debt to total assets, providing insight into overall leverage rather than monthly payment capabilities. The second option simply states the total amount of monthly debts without considering income, missing the relational aspect that the ratio embodies. Lastly, the fourth option discusses savings, which is unrelated to the measurement of debt payments in relation to income. Thus, the correct answer emphasizes the relationship between monthly debt payments and gross income, forming the essence of what the debt-to-income ratio measures.