Your debt-to-income ratio (DTI) represents the relationship between how much money you owe your creditors and how much-secured income you anticipate receiving; this is a significant component that lenders consider before they lend capital. Fortunately, there are several ways you can get a debt consolidation loan even if you have a high debt ratio.
Debt Consolidation Explained
A debt consolidation loan combines your credit cards, medical bills, and any other high-interest debts into a combined monthly payment at a lower interest rate than your credit cards. Interest on debt consolidation loans, unlike on credit cards, is not compounded (interest charged on the interest incurred). Some companies offer instant online prequalification and approval.
Why DTI Matters
Prequalification can help with assessing loan offers and closing costs as lenders estimate your terms through a soft credit check process that does not hit your credit score. However, one of the things lenders consider is how much you already owe against your current income level. The idea being if things are too far apart, you’ll have trouble repaying the consolidation loan.
Most lenders do not disclose their DTI requirements even though DTI is a significant factor used in their loan approval process. There are several borrowing possibilities for the amounts you need for people above this threshold, even with a high debt-to-income ratio.
Types of debt consolidation loans for high DTI situations are:
- Unsecured personal loan with co-signer since it is unlikely that you will qualify for an appropriate unsecured personal loan on your own if you have a high DTI. You can apply for a personal loan that allows a co-signer. In this situation, the lender considers the cosigner’s credit and income over yours when evaluating the application since the co-signer will be responsible for paying if you default. This can be a good way to get a debt consolidation loan fast, however you must be careful to ensure you don’t leave your benefactor swinging from a hook.
- Secured personal loans require the borrower to put up collateral, such as money in a bank account, a vehicle’s title, etc.; thus, reducing the lender’s risk in case of default. The collateral provided must be at least worth as much as the debt obligation.
- Debt consolidation programs involve a company negotiating with your lenders on your behalf to get you lower rates. You make regular payments to that company, which in turn allocates the money to your creditors. Enrollment in a debt consolidation program that doesn’t focus on credit history means that the program can execute a soft pull of your credit, but you’re less likely to be rejected because of your high DTI than with a loan.
- Home equity loans require that you put your house up as collateral, so if you do not pay the loan back, you risk foreclosure. And since the amount you can borrow is based on your home’s value, minus the outstanding mortgage balance, you can consolidate more debt. It is worth noting that your credit score needs to be at least 620 to be eligible for this option.
It can seem incredibly challenging to qualify for a loan when you are in debt, and that debt represents a major percentage of the money you need to keep available for other monthly payments.
Plus, it is even harder to get approved for a big enough unsecured loan to consolidate existing debts or a low enough annual percentage rate (APR) to save money. But suppose you are committed to paying off the total amount of your debt under a consolidated loan and have a plan in place to help avoid acquiring more debt in the future.
In that case, most forms of debt consolidation loans make it easier to manage your obligations by combining your debts into one simplified payment. Just be careful to choose the approach that’s right for you.
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