What is Eric's debt-to-income ratio based on his annual income and debt repayments?

• A. 30 percent
• B. 35 percent
• C. 41 percent
• D. 50 percent

Answer: (C)

Debt-to-income shows how much of earnings go toward debt payments. To find it, take total debt payments for the period, divide by gross income for the same period, then express the result as a percentage. For Eric, the annual debt repayments divided by his annual gross income comes out to 0.41, or 41 percent. That means 41% of his income is used to cover debt obligations. This helps lenders judge how much additional debt he could take on without overextending himself. If the debt payments were smaller relative to income, the ratio would be lower; if they were larger, the ratio would be higher, such as 50% or more.