Are you feeling stuck under a mountain of debt? You’re not by yourself. By combining several loans into one with a hopefully lower interest rate, debt consolidation can help you save money and simplify your finances. But what happens if your DTI, or debt-to-income ratio, is too high? Be at ease! It does not preclude the possibility of debt consolidation.
Let’s explore your options for debt consolidation with a high debt-to-income ratio.
Know Your Debt-to-Income Ratio: How to Calculate
Lenders can assess your ability to take on more debt by looking at your debt-to-income ratio, which provides them with an overview of your financial condition.
Calculating your DTI is simple. First, compile all of your monthly loan payments. It covers the minimum payments required for any ongoing debt, such as credit card, auto, and school loans. Remember to consider child support or alimony, if applicable.
Next, total up all of the pre-tax income you receive from wages, salary, and other sources. Next, add up all your monthly debt payments, divide by your total monthly income and multiply by 100. It is DTI for you.
For example, if your monthly debt payments are $775 and your gross monthly income is $5,000, your DTI would be 15.5% ($775 divided by $5,000 = 0.155; 0.155 x 100 = 15.5%).
How Does High DTI Hurt Your Consolidation Chances?
Generally, a DTI above 43% is high. Some consolidation loans may allow a DTI of up to 50%, but these are exceptions. The sweet spot for unsecured personal loans used for consolidation is 36% or lower.
Some lenders won’t even consider you for a consolidation loan if your DTI is too high. It limits your ability to shop around for the best rates. Even if you do get approved for a consolidation loan, higher interest rates will negate the benefits of consolidation.
Debt Consolidation Solutions for High DTI Ratio
While a high DTI can limit your options, it shouldn’t be a deal-breaker for securing a loan with a high DTI ratio for debt consolidation. Here are some alternative approaches to consider:
- Secured Loan
Secured loans require collateral, like a vehicle, home, or another asset, in exchange for lower interest rates and better loan terms than unsecured options. But be aware of the risk. If you don’t pay back the loan, the lender can take your collateral.
- Partner Up with a Co-Signer
Team up with a financially responsible friend or family member with good credit and low DTI. You’ll have a better chance of qualifying for an unsecured debt consolidation loan with a competitive rate. Remember, co-signing is a big commitment. Non-payment on your part will hurt your relationship with the co-signer.
- Leverage Balance Transfer Offers
Credit card companies lure new customers by offering no interest on balance transfers for a short introductory period. If you have decent credit and not too high DTI, consider transferring high-interest credit card debt to a new card that provides a 0% introductory period. But be aware of the intro period expiration date. If you don’t pay off the balance before the rate jumps, you’ll be worse off.
- Home Equity Loan
A home equity loan lets you borrow funds using the equity in your home as collateral. The terms on these loans are good but remember you’re using your home as collateral. If you default on the loan, you risk foreclosure.
- Cash-Out Refinance
Cash-out refinancing involves substituting your existing mortgage with a new one for a larger amount. The difference between the new loan amount and your existing mortgage goes towards paying off other debts. While the lower interest rate and longer repayment term might be tempting, this also adds to your mortgage debt and places your home at risk if you can’t make payments.
Conclusion
High DTI is a bump, but it doesn’t have to be the end of the road for your debt-free journey. By exploring other consolidation options, like getting a loan with a high DTI ratio and creating a plan to manage your debt, you can break the cycle of high-interest payments and take control. Just make consistent progress, and don’t be afraid to ask for help if you need it.