Debt-to-income ratio
Debt-to-income ratio is a fancy way of saying how much money someone owes compared to how much money they make. Imagine if you got $10 every week from your allowance (the money your parents give you to spend) and then you wanted to buy a toy that costs $5. That means you spent half of your allowance on the toy.
When grown-ups want to buy things like a house or a car, they usually need to borrow money from the bank. But just like how kids can't spend all their allowance on toys, grown-ups can't borrow too much money because they need to pay it back with something called interest (which is like an extra fee).
So the bank will look at how much money someone owed and how much money they make each month (from a job or other sources) and figure out if they can manage to pay back the loan. This is where the debt-to-income ratio comes in.
It's like another math problem - if someone makes $2,000 every month and they owe $500 for a car payment and credit cards, that means they have a debt-to-income ratio of 25%. That's because $500 is 25% of $2,000. If the ratio is too high, that means they might have trouble paying back the loan on time each month.
So when grown-ups want to borrow money, the bank will look at their debt-to-income ratio to see if they can manage the loan. It's like a way for the bank to make sure they can trust the grown-up to pay the money back on time.
When grown-ups want to buy things like a house or a car, they usually need to borrow money from the bank. But just like how kids can't spend all their allowance on toys, grown-ups can't borrow too much money because they need to pay it back with something called interest (which is like an extra fee).
So the bank will look at how much money someone owed and how much money they make each month (from a job or other sources) and figure out if they can manage to pay back the loan. This is where the debt-to-income ratio comes in.
It's like another math problem - if someone makes $2,000 every month and they owe $500 for a car payment and credit cards, that means they have a debt-to-income ratio of 25%. That's because $500 is 25% of $2,000. If the ratio is too high, that means they might have trouble paying back the loan on time each month.
So when grown-ups want to borrow money, the bank will look at their debt-to-income ratio to see if they can manage the loan. It's like a way for the bank to make sure they can trust the grown-up to pay the money back on time.
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