How do you find a lender to approve an unsecured personal loan when you have a high debt-to-income (DTI) ratio?
Unsecured means you do not pledge collateral like a mortgage or car loan. Therefore, lenders will employ a stricter definition of an acceptable DTI.
Your DTI ratio is not part of your credit score. However, lenders use the calculation as an additional underwriting tool to project the affordability of a new loan.
Therefore, the secret to success is lowering monthly payments through debt consolidation. Close one or more accounts and transfer the balance to a new loan with different terms.
Acceptable DTI Ratio
An acceptable debt-to-income ratio for an unsecured personal loan varies because lenders consider other criteria when making decisions. Underwriting is a balancing act; when one factor is negative (high DTI), other positive elements can equal things.
Credit Score
For example, individuals with a good credit score but a high debt-to-income ratio can obtain a personal loan approval via their sterling history of on-time payments of other obligations.
Good credit scores allow lenders to stretch the parameters of an acceptable DTI by adding a positive element to balance out the application.
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Proof of Income
Proof of income documentation influences what finance companies might consider an acceptable debt-to-income ratio for a personal loan. They feel most comfortable when they can validate a strong earnings history with few interruptions.
Conversely, self-employed loans without proof of income force lenders to lower the maximum DTI. The individual lacks this positive element to balance their application.
Job Verification
Job verifications factor into what banks consider an acceptable debt-to-income ratio for a personal loan. Bankers want reassurance that you are gainfully employed and have a future stream of wages to repay the obligation.
For example, unemployment loans without job verification will have much harsher maximum DTI requirements. These individuals lack a second positive element in their applications.
Tricks to Lower
Employ these tricks to lower your high debt-to-income ratio into the acceptable range for unsecured personal loan approval. Because DTI is a fraction, you can improve the numerator, the denominator, or both.
DTI = Monthly Debt Service Payment/Monthly Income
Increase Income
The first trick to lowering your DTI is increasing the monthly income reported to the lender. You do not want to understate the amount of money flowing into your checking account each month that you can dedicate to loan repayment.
Avoid omitting any of these sources of regular payments made to you from another person or organization.
- Job Employment
- Independent contractor side gigs
- Social Security disability benefits
- Social Security retirement benefits
- Child support or alimony
Shrink Monthly Payments
Reducing your monthly debt service payments, not the total amount owed is the second trick for lowering a high DTI to qualify for a personal loan. Lenders will calculate two ratios.
- Front End DTI includes housing expenses (28% respectable)
- Renters: monthly apartment lease payments
- Homeowners: mortgage, insurance, and property taxes
- Back End DTI includes other monthly obligations (36% respectable)
- Monthly car loan or lease payments
- Minimum credit card payments
- Monthly student loan payments
- Monthly payment plans for medical bills
- Other monthly installments
For instance, you could improve your front-end fraction by moving to a cheaper apartment and bolster your back-end percentage by trading in an expensive car for a more affordable model.
High DTI Consolidation
High debt-to-income consolidation loans work by lowering the monthly payments for all obligations – the numerator in the fraction. Typically, the borrower pays off one or more existing balances and transfers the receivable to a new contract with different terms.
Lower Interest
Fewer high debt-to-income consolidation loans lower monthly payments by reducing the interest charged. Many people struggling to keep their heads above water do not qualify for better rates because their credit scores are poor – but some are eligible.
Low-interest personal loans have more affordable monthly payments. For instance, suppose you have a $12,000 balance with a 4-year repayment term. As illustrated below, the interest-only amount owed per installment would shrink with the better rates.
| Interest Rate | Interest-Only Monthly Instalment |
|---|---|
| 5% | $26 |
| 10% | $55 |
| 15% | $85 |
| 20% | $118 |
| 25% | $152 |
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Longer Terms
Most high debt-to-income consolidation loans lower monthly payments by extending the repayment term over a more extended period. In other words, you are kicking the can down the road while incurring extra borrowing costs.
By definition, long-term loans have lower monthly payments. For instance, suppose you have a $12,000 balance. As illustrated below, the principal-only amount owed per installment would shrink with the repayment length.
| Repayment Term in Years | Principal-Only Monthly Installment |
|---|---|
| 1 | $1,000 |
| 2 | $500 |
| 3 | $333 |
| 4 | $250 |
| 5 | $200 |
High DTI Lenders
High debt-to-income personal loan lenders specialize in helping consumers struggling to stay afloat due to the crushing burden of their existing obligations.
The secret formula for approvals is simple: the DTI after consolidation counts.
Online Lenders
Online lenders often specialize in high debt-to-income personal loans. They have systems to base their underwriting on the projected DTI – after you consolidate accounts and restructure the monthly payments.
For example, online lenders will ask why you need the money on their intake form. They provide a drop-down menu of choices, listing their preferred options first.
- Debt consolidation
- Debt relief
- Credit card refinance
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Offline Lenders
Offline lenders like your local bank branch or credit union are less likely to specialize in high debt-to-income personal loans. These institutions typically target prime borrowers, people with excellent credentials.
People with bad DTI ratios rarely have good credit scores and often do not meet the underwriting criteria employed by bank branches and credit unions. Your income is not part of your consumer report, but your outstanding obligations are.
For instance, “the amount owed on revolving accounts is too high” is a score factor code indicating that credit card debt hurts your rating. Offline lenders might shy away from approving applicants with this profile.
