How To Get A Consolidation Loan - Even With A High DTI
Lenders use a variety of criteria to determine who is eligible for a loan. One of the most important criteria they consider is the debt-to-income (DTI) ratio. Those with a good debt to income ratio will receive better rates than those who do not.
A debt-to-income ratio looks at how much of one’s monthly income goes towards servicing debt. The DTI allows lenders to determine if an individual is capable of taking on more debt or not.
What DTI Is Considered High
Generally speaking, lenders like to see loan applicants exhibit a ratio of around 30% or less. Those who have a DTI between 37% - 49% are considered higher risk and those with a ratio of 50% or more are unlikely to receive a consolidation loan in most cases.
Determining DTI involves a simple calculation. Take all of your monthly payment obligations - rent, mortgage, credit cards, line of credit, HELOC - and divide it by your monthly income. For example, if your payment obligations amount to $1200 per month, and your monthly income is $3000, then your ratio is 40%.
1200/3000 = 0.40
Below we will outline the best options available for those who have a high DTI.
A Bad Credit Loan
A high debt to income ratio is heavily correlated with a low credit score, something that can be prohibitive to those looking to secure a consolidation loan. Individuals in this situation may consider a bad credit loan as a solution.
Bad credit loans are unsecured loans offered to people who have a FICO score of 630 or less. Lenders view these types of loans as high risk and thus charge higher interest rates, making the loans expensive for the borrower.
To qualify for a bad credit loan one must generally have a credit score of at least 600, have proof of consistent employment, and have a ratio that will allow them to take on more debt.
Individuals with a high debt-to-income ratio may consider a bad credit consolidation loan if the interest rate is lower than the interest rate of the debt being consolidated.
A Secured Personal Loan
A secured personal loan requires some type of collateral to guarantee the debt. The asset can be anything of value but typically a house or vehicle is used to secure the loan.
Because a secured personal loan requires collateral, they are easier to obtain and come with lower interest rates than unsecured loans. While this may be good for individuals who have a high ratio, it can result in the lender seizing whatever property was used to guarantee the loan should the borrower fail to make their payments.
A Home Equity Loan
Homeowners have the option to borrow against the equity in their home. To understand how this works we must first understand the concept of equity.
Equity refers to the ownership stake one has in their home. It is the total value of the house minus any liabilities they have on it. For example, let's say an individual owes $200,000 on a home that has been appraised at $600,000. This would mean they have a total of $400,000 of equity in their home.
Current Appraised Value Of Home - Liabilities = Equity
There are two types of equity loans one can use to consolidate their debt.
The first one is a basic home equity loan, in which the borrower receives a single lump sum and is required to pay back the loan in monthly installments over a set period.
The second type is called a Home Equity Line of Credit (HELOC) which gives the borrower access to a revolving line of credit.
A home equity loan is a secured debt, meaning that should a borrower default on their loan, the lender can repossess their house.
A Loan With A Co-Signer
Some people with a high DTI will find they are unable to receive an unsecured consolidation loan. If they do not own any assets they could use to guarantee the loan their last option would be to find a cosigner to guarantee the loan.
A cosigner is an individual who agrees to take full responsibility for paying back a loan should the original recipient fail to make their payments. If the cosigner has a good credit history and a ratio somewhere around 30%, it could result in lower interest rates than a bad credit loan.
Consolidating debt with poor credit is not always easy. Many lenders simply do not feel comfortable lending to high-risk individuals and many that do will charge exorbitant rates.
People who find themselves in this position must make sure they understand the options at their disposal as well as the DTI meaning to avoid any approval complications.