If you need to use personal loans for high debt-to-income ratio, you are not alone. Debt in the United States has reached a staggering $14.6 trillion. If your debt-to-income ratio is less than ideal, you may be struggling to find affordable loan options.
If this sounds familiar, you’ve come to the right place. We’ll go over everything you need to know about personal loans for a high debt-to-income ratio. High debt doesn’t have to hold you back from reaching your financial goals.
From what your debt-to-income ratio is to how to apply for a personal loan, and even sell your home, we’ve rounded up everything you need to know to start lowering your debt. Let’s get started finding the right solutions and personal loan options for your debt-to-income ratio.
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What is a Debt-to-Income Ratio?
The debt-to-income ratio refers to the amount of debt you have compared to your income. If your monthly income, for example, is $3,000 and your monthly debt payments add up to $2,500, you have a high debt-to-income ratio. This means you have a large amount of debt compared to what you bring in each month in income.
Lenders use this ratio to determine your ability to pay your loan back. If a lender feels you’re stretched too thin, they put you in a higher-risk lending category. The lower your debt-to-income ratio is the better your loan terms will be.
Whenever you apply for a new loan or line of credit, your debt-to-income ratio is taken into account. This ratio will affect your loan terms, interest rates, and how much financing you’re approved for. When you have a higher debt-to-income ratio, this can make obtaining financing difficult.
How is Your Debt-to-Income Ratio Calculated?
Your debt-to-income ratio is made up of all your monthly debts. This includes your mortgage payment, your student loans, and your credit card debt. Your income is calculated using your gross monthly income.
To calculate your own debt-to-income ratio, you’ll start by writing down your gross income. Next, write out all your debt payments. This should include your mortgage, car loan, student loans, and the minimum payments due on your credit cards. Total all of your debt together.
Next, take your monthly debt divided by your gross income. This number is your debt-to-income ratio. You don’t need to include your grocery bills or utility payments in this number. This is only calculating the amount of debt you have.
When you’re looking to get a personal loan, a mortgage, or any other form of financing, you’ll want to factor in your other expenses for your own personal knowledge. Your debt-to-income ratio doesn’t take all your spending into account. It also doesn’t factor in paying more than the minimums on your credit card.
Why Your Debt-to-Income Ratio Matters
Your debt-to-income ratio matters in a lot of financial situations. To start, when you go to apply for a personal loan or another type of loan, your lenders are looking at this ratio. This ratio shows how responsibly you handle debt.
A high debt ratio signals risk to a lender. A low ratio shows you can comfortably pay back your loan. Without this ratio, it’s difficult for a bank to know if you can afford your loan payments based on income alone.
A high-earning individual isn’t always debt-free. You can earn a high income and also rack up a lot of debt. Someone who earns far less may not use their credit cards often or have a mortgage, for example. This person may be more likely to have a lower debt-to-income ratio.
If you have a higher debt-to-income ratio, you may pay more in interest on your personal loan. Traditional banks, in particular often have harder qualifications on personal loans. This is where an alternative lender or one who specializes in higher-risk financing may be a better option. Depending on your interest rate, your debt-to-income ratio could cost you a lot in interest charges over time.
What is a Personal Loan?
A personal loan is an unsecured loan taken out by a financial institution, online bank, or even an individual person. The loan is unsecured because it generally isn’t backed by any collateral. This makes it a slightly higher-risk loan for lenders.
Unlike a mortgage or a car loan, you aren’t using a home or a car as collateral if you fail to pay your loan back. This is why a personal loan tends to also be for a smaller amount of money. The interest rate on a personal loan may be more than a mortgage but it tends to be much lower than a high-interest credit card.
A personal loan is personal because it isn’t tied to a specific purchase such as a car. While you may think getting a loan isn’t a great idea when you already have a lot of debt, personal loans are often used for debt-reducing purposes.
What Can You Use a Personal Loan For?
A personal loan is often used to consolidate debt, pay an unforeseen expense, or pay off higher-interest debt. A personal loan shouldn’t be used to increase your debt. Instead, you want to use a personal loan for something that improves your financial situation.
You can use a personal loan to make a home improvement, for example, that boosts the value of your home or helps your home sell faster. You can also use it to buy a piece of equipment that you need to take your business to the next level. These types of purchases could actually boost your income and help you pay off the loan quickly.
For people in debt, a personal loan is a common solution. It may seem backward to get a loan to decrease your debt but a personal loan can actually help you pay off higher-interest debt so that you can pay off your debt sooner. Instead of paying all the interest fees, you actually make payments that pay down your principal balance.
Using a personal loan to help you pay off high-interest credit cards could help you get out of debt faster. Now that you have a lower interest rate, more of your payments are going toward reducing your debt. The key is to make sure you don’t keep using your high-interest credit cards while you also have a personal loan. This will just add to more debt.
How Personal Loan Options for High Debt-to-Income Ratios Work
If you have a high debt-to-income ratio it may seem like there is no end in sight. Making your minimum payments likely aren’t making a big enough debt in your credit card bills. If you’re spending more than you’re making, you’ll keep seeing those credit card bills creep up.
Debt is like a hamster wheel. You can keep going around in a circle until you make a conscious effort to get off. This is where a personal loan may come in handy. To start, make a plan for what you want to use your personal loan for. This could be for a side hustle expense or to consolidate your debt, for example.
Next, you’ll want to gather your financial information and start shopping for a bank or online lender. The loan terms and interest rates on a personal loan will vary by lender. Once they have all your key information on your income, your credit history, as well as your debt-to-income ratio, your lender will let you know how much you’re approved for.
Once you’re approved, you can make your purchase, pay off your debt, or make the home improvement you were aiming to. After a few loan payments, you’ll be on your way to less debt or a boosted home value, for example.
Make a Plan to Reduce Your Debt
In addition to personal loans, there are other things you can do to improve your debt-to-income ratio. To start, create a budget of all the income you have coming in as well as your expenses. You want to be as detailed as possible here to make sure you’re getting an accurate picture of your finances.
Next, look at all your fixed expenses. These are things such as your mortgage, rent, car payment, and student loan payments. These are expenses you have to pay. Your other expenses, such as gym memberships, or groceries, for example, are costs you can cut or adjust if needed.
Once you see what you’re left with you can make a plan to start paying off your debt. You can start by using your personal loan to pay down your high-interest cards first. After your cards are paid off, you can call your credit card company to freeze them. This means you can’t use your card until you unfreeze your account.
You can also trim some of your other expenses to start building up an emergency fund as well as pay off your personal loan. The less you spend, the more you can save and the more payments you can make on your personal loan. This will help you get out of debt, reduce your debt-to-income ratio, and stay out of debt in the future.
Selling a Home or Selling a Car: Additional Ways to Reduce Your Debt-to-Income Ratio
In addition to paying off your high-interest credit cards, there are other ways to reduce your debt. If you own a home with a mortgage, this is also contributing to your debt totals. In today’s real estate market, homes are in short supply. This could mean a big payout for your home.
If your home needs a lot of work, you may be hesitant to believe you can get an offer on your home. This is where an all-cash, as-is offer from an investor can help you sell your home and reduce your debt. With our home buying program, you don’t have to wait months for a buyer to buy your home. You’re given a free home evaluation, a cash offer from one of our partners, and a quick closing.
Once your home is sold, your debt-to-income ratio will go way down. You’ll have a lot more financial freedom to buy or rent your next home. In addition to selling your home, you can also sell your car. Maybe you and your spouse or partner, no longer need two cars, for example.
Once you sell your home, you can move to a more walkable location, where one or no car is necessary. Removing your car loan could greatly reduce your debt-to-income ratio. You can buy or rent a less expensive home and also buy a less expensive car without the need for a car loan. Between this and reducing your debt with a personal loan, you may be able to lower your debt ratio in just a few short months.
Personal Loans for High Debt to Income Ratio 101
If you need to use personal loans for high debt-to-income ratio, you’re on the right track. Although a personal loan may add to your debt total, it will also help you lower your debt if used correctly. In addition to personal loans, you can also look to sell your home.
Selling your home to one of our partners is an easy and simple process. The sooner you sell, the sooner you can reduce your debt, and move on to the next chapter in your life. If you’re looking to learn more about the iBuyer process and selling your home, submit your address here. Let’s get your home sold and your debt ratio lowered.