How to Get a Consolidation Loan with a High Debt to Income Ratio
- DTI, or debt-to-income ratio, is the total debt payments divided by your before-tax income.
- It can be difficult or expensive to get a debt consolidation loan with a high debt-to-income ratio (DTI).
- Some lenders will not lend with DTIs over 36%, while others will go up to 50%.
If you’re trapped under a pile of credit card debt, you may know that a consolidation loan could help you put that debt in the past. However, consolidation loans for those with high debt to income ratios are no easy feat. Your debt to income ratio (or DTI), the relationship between how much money you owe and how much money you have coming in, is a major factor that lenders consider before they let you borrow money.
Fortunately, there are ways you can get a loan even if you have a high DTI. We’ll explore the ins and outs of loans for high debt to income ratio borrowers, as well as other options for debt relief.
Basics of debt consolidation loans
A debt consolidation loan involves taking out a new loan to pay off one or more unsecured loans you already have, allowing you to bundle your existing debts into one monthly payment at a lower interest rate. While it can be challenging, some lenders do offer debt consolidation loans for high debt to income ratios.
Keep in mind that these lenders may have additional requirements for borrowers, like having three years of good credit. If you meet these requirements, they are more likely to lend to you. Also, while a debt consolidation loan can help you resolve your debt, it won’t teach you how to spend responsibly.
Bad credit loans
If you have a high DTI that has led to bad credit, you may be eligible for a bad credit loan, a type of personal loan that may be available to borrowers with a FICO credit score below 630. However, this type of loan is usually expensive because bad credit loan lenders view their borrowers as risky and, in order to protect themselves, charge higher interest rates.
If you pursue a bad credit loan, make sure it’s an installment loan rather than a payday loan. Payday loans are generally more expensive and come with shorter terms than installment loans, making them very risky. You should also work with a reputable lender who considers your ability to repay the loan, offers flexible repayment terms, and performs a soft credit check, which won’t negatively impact your credit score.
What constitutes a high DTI?
Your debt to income ratio is calculated by dividing your monthly debt payments by your monthly gross income. If your DTI is between 37 and 49 percent, some lenders may consider you a risky borrower but still approve you for a loan with less-than-ideal terms. If your DTI is 50 percent or higher, it could indicate you may not have the money to pay back a loan and you’ll likely have difficulty getting approved by a lender.
Getting consolidation loans for high debt to income ratio isn’t impossible, but requires some diligence and patience. If you want to qualify for a loan with good terms, it’s a good idea to keep your DTI below 36 percent.
Calculate Your DTI.
Secured personal loans
Secured personal loans for high debt to income ratio are another option. Since secured personal loans require backing with an asset you own, such as a house or car, they are easier to obtain and come with lower interest rates than unsecured personal loans. If you have a high DTI that has left you with bad credit, you’ll likely have an easier time getting approved for a secured personal loan than an unsecured one.
If you go this route, however, you’ll be putting your asset on the line because if you fail to make payments, the lender will seize your asset. You may also be required to give up the title of your home or car or other chosen asset until you’ve repaid your loan.
Get a cosigner
If you can’t get approved for a loan on your own because of your high DTI, you may be able to get approved with a cosigner, who promises to repay your loan if you’re unable to. Choose a cosigner who has a DTI below 36 percent and is willing to accept the responsibility of repaying your loan if you are unable to.
Just make sure that whoever you choose has your best interests in mind and understands that you’ll work hard to repay the loan—if you don’t, you can damage their credit and put them in a difficult situation. Therefore, it’s best to avoid this option if you’re not confident in your ability to repay.
Tap into home equity
If you’re a homeowner with some equity in your home, you may be able to borrow against it. To borrow against your equity, you can take out a home equity line of credit (HELOC) and draw funds as needed. Think of a HELOC as a credit card, where a lender gives you a maximum loan amount and you can take out as much as you want until you reach the limit.
Another option is a home equity loan. Instead of a revolving credit line, a home equity loan gives you a fixed amount of money in one lump sum that you’ll pay back over a certain period of time. The greatest advantage of borrowing against your home equity is that you can qualify for a much lower interest rate than you may be able to with a personal loan or credit card.
How to lower your DTI
If you would like to take out a loan but your DTI is higher than you’d like it to be, there are ways you can lower it to increase your chances of getting approved for the loan. Here are some options that could give you a lower DTI:
Pay off your loans ahead of schedule. Most loans require you to pay a certain amount every month until you’ve repaid them. If you can find room in your budget, consider making extra payments to pay them off faster.
Earn extra money. If you can’t pay down debt any faster, then focus on increasing your income. Try negotiating a raise, looking for a new full-time job that pays more, or starting a side hustle.
Use a balance transfer to lower interest rates. Consider a transfer of debt onto a zero-interest credit card with a 0% APR promotional period. Without interest (for a limited time), you could pay off the balance faster and reduce your debt.
Cut your spending.Take a close look at what you spend each month. Do you really need to go out to lunch every day? Spending less money will give you more money left over each month to pay down your debt.
Stay on top of your credit report. One error on your credit report can significantly increase your DTI, so you’ll want to check your credit report annually for accuracy. You can go to com view your credit report at the three major credit bureaus.
Alternatives to debt consolidation loans
While pursuing loans for high debt to income ratio borrowers is possible, there are some alternatives worth considering.
Credit counseling. A credit counseling agency can help you get out of debt by designing a monthly payment plan that works well for your particular budget and lifestyle. Make sure you select an accredited, certified agency that is a member of the National Foundation for Credit Counseling or the Financial Counseling Association of America.
Debt settlement. A debt settlement company could negotiate with your creditors and get them to settle for less than what you owe to consider the debt paid. Debt settlement may be a good option if you have a substantial amount of unsecured debt, are several months behind in your payments, and like the idea of being able to settle your debt in 24 to 48 months.
Filing for bankruptcy may make sense if you have a high DTI, since it indicates financial distress and may signify that your debts are too high to repay on your own. During Chapter 7 bankruptcy, some or most of your possessions could be sold to pay for your debts. Chapter 13 bankruptcy is an option if you’re not eligible for Chapter 7 and have enough income.
Plan for getting out of debt, even with a high debt to income ratio
If you are struggling with debt, you might be considering consolidation loans. For high debt to income ratios, however, you may want to look at your other options before deciding. Freedom Debt Relief can help you understand these options, including our debt settlement program. Our Certified Debt Consultants can help you find a solution that will help you get a handle on your finances. Find out if you qualify right now.