Residual income is best described as the income remaining after deducting debt obligations from gross income.

• A. Disposable income.
• B. Residual income.
• C. Net income.
• D. Take-home pay.

Answer: (B)

This question tests understanding of what residual income represents in personal lending. It is the amount of money left over after you deduct monthly debt obligations from your gross income. In other words, you start with gross income and subtract what you must pay each month for debts (loans, credit card minimums, etc.). What remains is the residual income—the funds available to cover living expenses and other financial needs.

Disposable income, by contrast, is what you have after taxes, not after debt payments. Net income is typically the earnings left after all expenses, taxes, and costs have been accounted for, which isn’t the same as money available after debt service. Take-home pay is your earnings after taxes and other payroll deductions, again not specifically after debt obligations.

So the correct concept is the money left after debt obligations are subtracted from gross income, the amount lenders look at to gauge continuing ability to meet living costs while repaying debt.