Kim Lee is trying to decide whether she can afford a loan she needs in order to

Question

Kim Lee is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Kim is living at home and works in a shoe store, earning a gross income of $2990 per month. Her employer deducts a total of $160 for taxes from her monthly pay. Kim also pays $85 on credit card debt each month. The loan she needs for chiropractic school will cost an additional $140 per month.

Calculate her debt payments-to-income ratio with college loan. Don't forget to convert your answer to a percentage.

Explanation / Answer

Debt payments to income ratio determines the total monthly debt payments of an individual with respect to or as a percentage of his total monthly gross income. It measures the individual's abilities to service his monthly debt payments.

Total monthly gross income = $2990

Recurring monthly debt payments including college loan = credit card debt payment + collge loan debt payment

                                                                                         = 85 + 140 = $225

Debt Payments to Income ratio = Recurring monthly debt payment / Monthly gross income

                                                 = 225/2990 = 0.0753 = 7.53%

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