Consolidating Debt and Loans with a High Debt-to-Income Ratio

Solutions for High Debt-to-Income Ratio Debt

Debt consolidation is combining multiple bills into one large debt that is paid off with a loan or debt-relief program that has more favorable interest rates and a reduced monthly payment.

A debt consolidation loan from banks, credit unions or online debt consolidation lenders is the most common form of debt consolidation, but lenders are reluctant to give money to consumers with a high debt-to-income ratio (DTI).

Consumers with a high DTI are considered a severe risk so even if you are approved for a loan, the interest rates and monthly payments could be so high that it’s not worthwhile.

It can be difficult to get a debt consolidation loan at the rate you like, but there are ways around the problem. Other debt-relief options, like a debt management program, may help you consolidate your debt without having to take out a high risk loan.

What Is a High Debt-to-Income Ratio?

Debt-to-income (DTI) is a tool that lenders use to measure what percentage of your income goes toward paying off debts and whether there will be enough money left each month to repay another loan.

The formula for calculating DTI is simple: Monthly debt payments divided by monthly income.

The debt payments should include costs for housing, utilities, car, student and personal loans, alimony or child payments and minimum amount due on credit cards. Income should money your receive weekly or monthly that includes wages, tips, bonuses, child payments, alimony and Social Security.

When you do the math, you will arrive at a percentage. So, if your debt payments are $1,800 a month and your income totals $4,000 a month, your DTI is 45% (1800 ÷ 4000 = .45).

Anything over 43% is considered a high DTI. Acceptable DTIs vary from lender to lender, but generally speaking this is how they breakdown:

0% to 36% — You are good to go. You have demonstrated an ability to manage your money in a responsible way.

37% to 43% — A little bit of a gray area. Still qualified for a loan, but the interest rate will be slightly higher than you’d like.

44% to 50% — This is the high-risk bracket. IF a lender approves a loan (some won’t), it will have an interest rate high enough to ease the lender’s concern.

50% — Most lenders will deny consumers in this bracket. There are “bad credit” lenders who may approve a loan, but it will be at an elevated interest rate that even the borrower will have to reconsider whether he/she is gaining anything from a loan at this rate.

Solutions for High Debt-to-Income Ratio?

The fact that you have a high debt-to-income ratio doesn’t mean you are never going to qualify for a debt consolidation loan. However, it does mean that you’re going to have work harder to find a lender willing to approve a loan and it’s likely to include a less-than-desirable interest rate.

The starting point should be identifying companies that market “bad credit loans“, which are the category you fall in with a high debt-to-income ratio. A bad credit loan is designed for people with high DTIs and low credit scores.

Most of the companies offering bad credit loans are going to be online lenders and while they may advertise rates as low at 7%, they also have a top end of 36%. Your loan is going to be a lot closer to 36% than it is 8%.

Avant probably is the best known bad credit loan lender, but there are several places to shop around including PeerForm, LendingClub and OneMain Financial. It’s worth your time to ask a local bank, if you have a great relationship there or a credit union, which has more flexibility in decision making on loans.

To avoid being rejected for a bad credit loan, try finding someone with really good credit to co-sign the loan with you. The loan terms would reflect the co-signer’s credit history and help reduce the interest rate you pay.

If you own a home, another solution would be tapping into the equity you’ve built there. That certainly would produce the lowest interest rate, but it also puts your home at risk of foreclosure if you don’t make payments. Consider this a last-ditch option.

How to Lower Your DTI

This is the avenue you want to go down if you’re trying to improve your financial situation. Here are some steps you can take to lower your DTI and make yourself a more attractive candidate for a loan.

• Pay off loans early. Lowering the amount of debt you have is the fastest way to improve your DTI.
• Increase income. Finding a second job or getting a promotion with an increase in pay is the second fastest step toward improving your DTI. More income means more opportunity to pay down debt, which means an improved DTI. Side hustles are plentiful on the internet these days.
• Reduce spending. Things like eating out, shopping for clothing, and entertainment spending add to your debt. Put all of them on hold and dedicate more of your paycheck to reducing, then eliminating debt.
• Credit report. The Federal Trade Commission says 40 million people have mistakes on their credit report that negatively impact credit scores and DTI. Are you one of the 40 million?
• Balance transfer card. This is a total longshot because you need a credit score of 680 or higher to get a 0% balance transfer card. But if you qualify, take it and apply as much of your income as you can to wiping out credit card debt altogether.
• Refinance loans. If you refinance loans by extending the payment times, it will lower your monthly debt payment and this increase your DTI. However, this is the least desirable method available. It keeps you in debt longer and you pay more interest.

High Debt-to-Income Ratio Not a Barrier to Nonprofit Consolidation

If you are struggling to get a debt consolidation loan because of high debt-to-income ratio, consider another form of consolidation that doesn’t require a loan — a debt management plan.

InCharge Debt Solutions consolidates your credit card debt using a debt management plan – not a loan — to pay off the debt. Eligibility isn’t based on a credit score, but rather your ability to pay off the debt.

A debt management plan reduces the interest rate on your credit card debt to somewhere around 8%. Compare that to the 30%-36% rates you could be paying on a debt consolidation loan.

InCharge credit counselors work with credit card companies to arrive at an affordable monthly payment that eliminates the debt in 3-5 years, or about the same repayment time for debt consolidation loans.

InCharge works specifically with clients, who may not qualify for other methods of debt relief.