You might think you are qualified for a debt consolidation loan, only to find out you can’t get any pre-approvals, or you can’t get the loan you need. If your credit score is high, you might be wondering what is causing this denial. It might be your debt-to-income (DTI) ratio.
What is DTI?
If you are worried about your DTI ratio or you get a denial from a lender saying your debt-to-income ratio is too high, you need to look at your ratio to see where on the spectrum you fall. You can take all the debt you have every month and then divide it over your monthly income. Then, multiply that number by 100 to get a percentage. This is your debt-to-income ratio. It shouldn’t be less than 36% if you are planning to apply for a loan.
Why Do Lenders Look at My DTI?
Knowing how much debt you already have is important to lenders because they want to know if you can manage more debt or not. If you already have a high DTI, you might be considered a risky borrower and they will not allow you to borrow any more money.
When lenders are deciding if you can be trusted with a loan, they want to make sure you will be able to make your monthly payments. If you already have too much debt relative to your income, they might not think you can handle another loan or another priority.
How Can I Lower My Debt-to-Income Ratio?
If you calculate your DTI and it’s more than 36%, you might want to consider lowering your debt-to-income ratio before applying for a debt consolidation loan. Remember, every time you do an official loan application, your credit score will drop a few points when the lender does a hard inquiry. The drop in your credit score will also make it more difficult to get a loan from a lender.
To lower your debt-to-income ratio, you either need to raise your income or lower your debt. Both are easier said than done. Many people choose to spend a few months working overtime or start a side hustle to get some extra cash coming in.
You can also use a debt management plan, such as the snowball or avalanche method or the fireball method, which combines both methods to lower your debt.
How Debt Consolidation Can Help Lower Your DTI?
Debt consolidation takes multiple debts and rolls them into one lump sum that you pay off with either a debt-relief program or a loan. Both options usually leave the debtor with a lower monthly payment, including a more favorable and affordable interest rate.
When consolidating your debt, you aren’t lowering the total amount of debt immediately, but you are making it easier to pay off. As you work to pay off the debt, you can continually improve your debt-to-income ratio. The lower payment can also give you extra breathing room in your monthly budget and can help prevent you from falling behind again.
Debt Consolidation Options When Your DTI is High
While debt consolidation is a great way to help lower your DTI, not everyone will qualify to take part in these programs. If your DTI is 37% or higher, you are very likely to run into some challenges when applying for a debt consolidation loan. There’s a good chance your loan won’t be approved, and if you do get approved, you are likely looking at a higher interest rate.
If your credit isn’t the best and your DTI is high, you should look for companies that offer “bad credit loans”, which are intended for those with lower credit scores. One of the best ways to get approved for a debt consolidation loan if you have weak credit is by having someone with good credit co-sign with you. Alternatively, you could tap into your home’s equity, but this puts you at risk of having your home foreclosed.
There is also another option if you happen to have a relatively high DTI but also carry a very robust credit score. If this sounds like you, you may be in the ideal position to leverage a balance transfer card. This can help consolidate your debt, and in some cases, even lower the overall interest you may be paying on some of those outstanding balances.
Your DTI Matters
Lenders will not want to give you a loan when they see a huge part of your monthly income goes to paying off debt. Adding on another loan will also make it even harder to lower your debts every month, and lenders would rather work with less risky borrowers.
If you don’t have time to get another job or work overtime, you might want to consider refinancing some of your existing loans if you can. You should also try to make more than the minimum payment on your debts so that you can pay them off faster.
Once you’ve lowered your DTI a little, you can try applying for loans, such as a consolidation loan, to improve your financial situation even more.