How to Get a Debt Consolidation Loan with a High Debt-to-Income Ratio

What Is a High Debt-to-Income Ratio?

A debt-to-income ratio (DTI) is a calculation that lenders rely on to measure the percentage of your income that you use to pay your monthly debts and other bills.

Every lender has a DTI that it considers acceptable – and what it considers too high for a loan. Typically, a high DTI is any percentage higher than 43%.

Levels of DTI

What Is Debt Consolidation?

Debt consolidation combines multiple bills or debts into a single larger debt that you pay off with a loan or debt-relief program – one that has lower interest rates and a smaller monthly payment.

To make the strategy work, you must get approved for a debt consolidation loan. However, many lenders, even online debt consolidation lenders, say no to loaning money to people whose debt-to-income ratio is too high.

They consider people with high DTIs as severe credit risks. In fact, even if someone with a high DTI gets approved for a loan, the terms can be so negative that the resulting monthly payment is still too high, and the consolidation process is not worth doing.

Don’t get discouraged. There are ways to improve your debt-to-income ratio, something that will improve your loan terms and make a debt consolidation loan work for you in the end. And if that doesn’t work, there are other debt-relief options that may be better suited.

How to Qualify for a Loan with a High Debt-to-Income Ratio

Even if you discover your DTI is 43% or higher – likely too high to secure a debt consolidation loan with favorable borrowing terms – you still have options. Some options are easier than others, but they’re all worth exploring.

• Balance transfer: This tactic involves opening up a balance transfer credit card with no fees and a zero-interest term – if you can qualify. You then move the balance from your current credit card (or credit cards) to your new one. You effectively buy yourself more time to pay off the credit card without monthly interest fees accruing so that more money can go toward paying down debt.
• Getting a co-signer: Adding a second person to your debts allows your lender to use that person’s credit history to recalculate your DTI.
• Cash-out refinancing: With this option, you use a high-priced asset, such as a house, to reconfigure your debt. You refinance your home, pulling out equity to pay your outstanding debts. Your credit card debt then gets wrapped in your new (and higher) mortgage, which operates similarly to a home equity loan for bad credit by using your home’s value to manage existing debt. The new mortgage will extend your repayment term and should lower your overall monthly debt obligation, lowering your DTI in the process.

Having a high DTI means you’re going to have to work harder to find a lender willing to approve a loan, and it’s likely to include a less-than-desirable interest rate.

You can start by identifying companies that market “bad credit loans,”  which are the categories you fall in with a high debt-to-income ratio. Lenders hand out bad credit loans to people with high DTIs and low credit scores, but a secured loan might offer more favorable terms by requiring collateral.

Most of the companies offering bad credit loans are online lenders. While they may advertise rates as low as 7%, they also have a top-end rate of close to 36%. To work for you, your high-risk loan must have a rate much closer to 8% than 36%.

Either way, it is likely that joining a debt management program will offer better qualification standards and more competitive interest rates.

How to Lower Debt-to-Income Ratio

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 your loans early: Lowering the amount of debt you have is the fastest way to improve your DTI. One of the quickest – and easiest – ways to do this is to use the debt snowball method. That’s a tactic in which you pay off your smallest loans, regardless of interest rates, first. Then you pay off the next smallest debt. By turning your payoff habits into a rolling snowball, you generate momentum to keep your debt-paying behaviors.
• Increase your income: Finding a second job or getting a promotion with an increase in pay is the most effective way of improving your DTI. As long as you can make extra money to pay off debt, you’ll improve your DTI. Side hustles are plentiful on the internet these days.
• Reduce your spending: Eating out, shopping for clothing and spending money on entertainment add to your debt. Put all of them on hold, make a monthly budget and dedicate more of your paycheck to reducing your debt.
• Check your credit report: A joint investigation by Consumer Reports and WorkMoney found that 44% of consumers found mistakes are their credit reports – and more than one-quarter of them found serious errors. Any negatives on a credit report are detrimental to someone’s credit score and DTI.

» Learn more: How to Improve Debt-to-Income Ratio

Alternatives to Debt Consolidation Loans

Of course, debt consolidation loans aren’t the only way to pay off your debt when you have a high DTI. Here are some tried-and-true methods, some more appealing than others.

• Credit counseling: This free service educates you and finds your best debt relief options. Debt management may be one of them.
• Debt management plans: These plans lower interest rates and consolidated debts to improve your financial standing. No loans are involved, so qualifying is much easier.
• Debt settlement: This strategy promotes negotiating with your creditors to lower your debt amount, but this comes with many negative consequences. You will need to save up a lump-sum of money in order to settle your debt. During this process, you’ll stop making payments, trashing your credit, and you’ll rack up additional interest and fees.
• Bankruptcy: This legal maneuver can make for a fresh start, but the penalties are steep, and not everyone qualifies. Consider bankruptcy the least desirable possibility.

These are not the only options to pay down debt, but they are the ones most often used. Some other alternatives are more straightforward. You can always attack your personal finance budget and identify ways to save money every month.

Switching to a cheaper cell phone plan, downsizing your cable TV or streaming subscriptions and getting more frugal with your grocery shopping are three possibilities for cutting your monthly outflow of money.

You can also land another job. The most appealing options are side gigs you can create where you generate passive income, such as affiliate marketing with Amazon or Google or selling items on Facebook Marketplace, eBay or Craigslist.

If you’re a more hands-on person, offer your talents for money. Gardening, landscaping, yard work, resume-writing, cleaning and decorating are among the ways to make a few bucks on the side. Just make sure you fulfill any permitting requirements from the city or state where you live.

Work with a Credit Counselor

If you’re struggling to secure a debt consolidation loan because of a high debt-to-income ratio, consider another form of help as an interim step: working with a credit counselor. With solid guidance from our free resources, you can create a long-term financial plan to pay off debt.

InCharge’s credit counselors can help you run the numbers for various tactics to save you money and help you consolidate debt. One of the solutions may be a debt management program.

InCharge works with credit card companies to come up with an affordable monthly payment for you, one that eliminates the debt in three to five years – or about the same repayment time for debt consolidation loans. This plan lowers interest rates and consolidates your credit card debt without a loan. Eligibility is based on your ability to pay off the debt – not on your credit score.