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. But when you’re also dealing with a high debt to income ratio or DTI, getting this type of loan is no easy feat. Your DTI, which is 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.
How to Get a Loan If You Have a High DTI
Fortunately, there are ways you can get a loan, even if you have a high DTI. Here are some options you can consider.
Debt Consolidation Loan
A debt consolidation loan involves taking out a new loan to pay off one or more unsecured loans you already have. It allows you to bundle your existing debts into one monthly payment at a lower interest rate.
While a debt consolidation loan could simplify the debt payoff process and save you money, it can be a challenge to qualify for one if you have a high DTI. The good news is that some lenders are willing to approve high DTI borrowers for debt consolidation loans.
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. If you have a spending problem, it won’t keep you out of debt. In fact, it could push you deeper in.
Bad Credit Loan
If you have a high DTI that has led to bad credit, you may be eligible for a bad credit loan. A bad credit loan is a personal loan that is offered to borrowers who have bad credit or no credit at all. If you have a FICO credit score below 630, you may be a candidate for a bad credit loan. 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.
Secured Personal Loan
A secured personal loan is protected by an asset you own, such as a house or car. Since secured personal loans require an asset, they are easier to obtain and come with lower interest rates than unsecured personal loans that do not require any assets. 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.
With a secured personal loan, you’ll be putting your asset on the line because if you quit making payments, the lender will seize your asset. You’ll 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
A cosigner is someone who promises to repay your loan in the event you are unable to. 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. Choose a cosigner who has a good DTI that’s below 36% and is willing to accept the responsibility of repaying your loan if you are unable to.
You can ask a family member or close friend to be a cosigner. 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 repay the loan, you can damage the cosigner’s credit and put them in a difficult situation. Therefore, it’s best to avoid this route 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 find out if you have any equity, subtract your home’s current value from your mortgage balance. If your home is worth $150,000, for example, and you have $50,000 left on your mortgage, you have $100,000 in equity.
To borrow against this equity, you can take out a home equity line of credit or 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.
Keep in mind that if you have a high DTI, tapping into home equity may not work for you because you likely still owe a lot of money on your mortgage.
Consider All Your Options
Even if you have a high DTI and might not be an ideal borrower, you don’t need to take the first offer that comes your way. Do some online research to find out the ideal loan for your unique situation. Your goal should be to find a loan with a rate that saves you money on interest. Otherwise, there’s no reason to take one out.
What Constitutes a High DTI?
As you may already know, your DTI is calculated by dividing your monthly debt payments by your monthly gross income. If your DTI is between 37% and 49%, 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% 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.
Therefore, if you want to qualify for a loan with good terms, it’s a good idea to keep your DTI below 36%. With this type of DTI, almost any lender will consider you for a loan because they’ll feel confident that you won’t have any trouble making additional monthly payments.
How to Lower Your DTI
If 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 a loan and get more opportunities to save money. 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 every month to pay them off faster.
- Earn extra money: If you can’t pay down debt any faster, then focus on increasing your income to improve your DTI. Try negotiating a raise, looking for a new full-time job that pays more, and/or starting a side hustle like babysitting or selling clothes online.
- Use a balance transfer to lower interest rates: Transfer your debt onto a zero-interest credit card with a 0% APR promotional period. Since there won’t be any 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 money on every month. Do you really need to go out to lunch every day and pay for cable? 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. For this reason, it’s vial to check your credit report once a year for accuracy. You can go to AnnualCreditReport.com and view your credit report from Experian, Equifax, and TransUnion, the three major credit bureaus. Dispute any errors or inaccuracies you find.
Alternatives to Debt Consolidation Loans
Fortunately, you can get out of debt without a loan. Let’s take a look at several alternatives to debt consolidation loans that may work for you, even if you have a high DTI.
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. The most noteworthy benefit of this solution is its ability to protect you from creditor activity and delinquencies. It can also make the debt payoff process less overwhelming and more manageable.
Credit counseling can also offer you a debt management plan or DMP so you can get rid of your credit card debt. DMPs involve a credit counselor negotiating a lower interest rate on your credit cards and arranging a payment plan that allows you to become credit card debt-free in 3 to 6 years.
You’ll send your monthly payments to the credit counseling agency so they can distribute funds to your creditors until your debt has been completely paid off. If you choose credit counseling, 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.
In order to qualify for a DMP, your unsecured debts must add up to 15% to 49% of your annual income. Therefore, if your credit card debt has led to a DTI that exceeds this limit, you may want to consider an alternative solution.
A professional debt settlement company such as Freedom Debt Relief could negotiate with your creditors and get them to settle for less than what you owe to consider the debt paid.
If you pursue debt settlement, you’ll be responsible for depositing money into a special account every month while the debt settlement company contacts your creditors to negotiate lower settlement amounts. You’ll also need to pay a fee for each of the debts the company settles, which will range from 15% to 25% of your total enrolled debt.
Debt settlement may be a good option if you owe more than $7,500 in debt, are several months behind in your payments, and like the idea of being able to settle your debt in 24 to 48 months.
It’s important to note that if you choose this option, there are no guarantees that the debt settlement company will be able to negotiate your debt and you may still get phone calls and letters from debt collectors. Also note that since debt settlement involves letting your accounts go past due, your credit score will probably be negatively affected. But if you have a low DTI, your credit score may be low already.
Fortunately, a high DTI is irrelevant to debt settlement companies. Even if you have a high DTI, you may still go down this path.
Chapter 7 and Chapter 13 bankruptcy may make sense if you have a high DTI, as your DTI is a key indicator of 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. In certain states, if you own a home and don’t want to risk losing it during the bankruptcy process, this may not be the right option for you.
Chapter 13 bankruptcy is an option if you’re not eligible for Chapter 7 and have enough income. It can give you the chance to make one, consolidated payment toward your debts through a repayment plan, which is usually three to five years long. Keep in mind that bankruptcy is designed to help you with unsecured debts like credit card debt and medical bills, not student loans, child support, and tax debts.
Be sure to consider all alternatives before filing for bankruptcy, as it can stay on your credit report for 7 to 10 years and make it tough for you to get approved for a mortgage, car loan, or any other type of financing.
Even if you have a high DTI and you’re able to get a debt consolidation loan, you’re not out of the woods yet. After you’ve consolidated your debt, make sure you make your payments in full, on time, every month.
Do your best to avoid spending on your credit cards and adding to your debt pile, otherwise you could end up in a worse situation than you started in.