How to Consolidate Debt With A High Debt-To-Income Ratio

The debt-to-income ratio (DTI) is a financial measurement often used by lenders. It shows the relationship of your current debt to your current income. When lenders calculate your current DTI, they are trying to determine if you can pay back a loan. If you have a high debt-to-income ratio (a lot of debt), lenders consider you more of a financial risk. When seeking a loan, your DTI will determine whether you get approved for a loan or not. It may also determine the interest rate and loan terms. Thankfully, personal loans for a high debt-to-income ratio are still possible.

Let’s say your current outstanding debts total approximately $10,000. But you have to make several debt payments per month for different debts. And each debt likely has a different interest rate. Credit card rates, for example, are typically rather high. The interest rate on a car loan or student loan might be significantly lower. Regardless, making payments on each debt each month makes it difficult to quickly pay off a single debt. And a good portion of each payment is likely just paying off the interest accrued each month.

Varying Debts

Paying off various debts in this manner can take a very long time. And, you’ll wind up paying potentially thousands more in interest alone. Personal loans for a high debt-to-income ratio can solve this problem. Let’s assume you get approved for a personal loan for $10,000. You can then use that money to pay off all your other debts. That leaves you with only one debt to pay each month. And, the interest rates on personal loans are often lower than many other types of debt. Payment terms on personal loans are often a monthly fixed amount as well. That makes it much easier to pay off.

When you get a personal loan for the purposes of debt consolidation, there are many ways it can benefit you. But there are other factors you should also be aware of to make an informed decision.

Pros:

• When used for debt consolidation, you wind up with only one debt to pay as opposed to several.
• Interest rates are normally lower for personal loans.
• You often have more time to pay off a personal loan than other debts.
• Payments on a personal loan may be smaller than the total monthly payments on several debts.
• Most monthly payments are a fixed amount. This means you don’t have to worry about accruing interest.
• Debt consolidation can help you budget more easily.
• Paying on time helps to improve your credit score.

Cons:

• Personal loans often have additional fees, such as an origination fee.
• Some personal loans have early prepayment fees or penalties.
• If you are seeking a personal loan with a high debt-to-income ratio, you might get a higher interest rate on the loan.
• A low credit score can also affect the interest rate on the loan.
• It is tougher to get approved for some personal loans for a high debt-to-income ratio.
• If you have a higher interest rate on a personal loan, you may pay more interest, not less.

If you find yourself having trouble getting approved for a personal loan for a high debt-to-income ratio, consider these options.

Get a Secured Loan

A secured loan is a type of loan where you need to put up something as collateral before getting approved. The collateral can be a car or some other sizable asset of value. If you are unable to pay back the loan, the lender can take possession of the asset. However, since secured loans are not as risky to the lender, they often have better terms than unsecured loans.

Have Someone Co-sign With You

When you want to get a personal loan for a high debt-to-income ratio it may help to have a co-signer. If the co-signer has a good credit score and low DTI, it improves your chances of getting approved for the loan. And, you might even get favorable terms as well. However, you should keep in mind that if you fail to pay back the loan, you will negatively impact the co-signer’s credit as well as your own.

There are other options besides personal loans for consolidating your debts. If you own a home and have equity, you can get a home equity loan. These often have favorable terms, but there is also the risk of losing your home if you don’t pay it back.

Cash-Out Refi

Another option involving your equity is a cash-out refinance. You can refinance your home and take out a loan for more than you need using the equity in the home. You can use the extra cash to consolidate or pay off your debts. The terms and interest rates on cash-out refinancing are also very favorable. However, since the loan is essentially a new mortgage, you need to be certain this is the right choice.

Credit Card Debt

If your debts consist mainly of credit card debts, there is another option. You can transfer all the balances of your credit cards to a single credit card. Many credit card issuers offer balance transfer deals of 0% or very low interest for a period of 6-18 months. This can make it easier to pay down your debt without worrying about accruing interest. However, if the balance isn’t paid off before the introductory period ends, you may receive a high-interest rate moving forward.

Sometimes, the best thing to do before getting a personal loan for a high debt-to-income ratio is to simply lower your DTI. If you can manage to pay off one or two debts, it may positively impact your DTI. Then, you’ll be better able to secure a personal loan with favorable terms.

Earning More

Of course, you can also improve your DTI by earning more income. However, this is easier said than done, especially in a tough economy. But maybe you can work some overtime regularly or find ways to eliminate other unnecessary expenses. Anything you can do to increase your income can also improve your DTI.

If necessary, you might also benefit from credit counseling or a credit repair service. These programs can help you budget better to secure a stronger financial future.