Disposable income is gross income minus income tax on that income.
Discretionary income is income after subtracting taxes and normal expenses (such as rent or mortgage and food) to maintain a certain standard of living. It is the amount of an individual's income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of:
- Discretionary income = Gross income - taxes - necessities
Use of discretionary income in high-income loan applications
When applying for a loan
, consumer loan
may take into consideration a high-income applicant's discretionary income in order to assess the loan repayment capacity of the applicant. Discretionary income provides the lender with more information on the applicant's capacity to repay than the debt-to-income ratio
in the case where the applicant has a lot of debt, but also a lot of income, such that the percent of available income may be smaller than normal standards would allow, but the actual amount of money is still large.