How To Consolidate Debt With A High Debt-To-Income Ratio (2024)

An axiom of personal finance states that the only people who can borrow money are the ones who don’t need money. The irony of this well-established truth hits especially hard on those who have accumulated so much debt that they can’t use a consolidation loan to ease the burden.

However, there are ways you can consolidate debt even when you have a high debt load as measured by your debt-to-income ratio.

Determining Your Debt-to-Income Ratio

Debt-to-income ratio, or DTI, is a key personal finance figure. It shows the relationship of your monthly debt payments to your monthly income. It’s expressed as a percentage.

Lenders use DTI to make lending decisions. A lower DTI tells them a borrower is less risky. This can affect interest rates and other loan terms, as well as whether an application gets approved at all.

To figure your DTI, add up all your monthly debt payments. Include credit cards as well as auto, student, personal and other loans. Include alimony or child support payments you are obligated to make. Don’t include rent, insurance, gasoline, food, utilities and other non-debt expenses.

Now add up all your monthly income. Include salary, interest and dividends. Lenders vary, but including alimony and child support payments generally is optional.

Next, divide total monthly debt payments by total monthly income. Multiply the resulting decimal figure by 100 to get your DTI as a percentage.

How Debt Consolidation Works

Debt consolidation loans provide money to pay off other loans. Why borrow money to retire your debts? Several reasons:

1. A debt consolidation loan lets you stretch out the time you’ll have to pay off your debts. This lets you make smaller payments. Among other benefits, this can ease the stress of monthly ends-meeting.
2. You may be able to get a lower interest rate on a debt consolidation loan. Lower interest can also mean lower payments and less stress. This is especially true if your existing debts include credit cards. And it’s even more true if you have missed a payment on one or more credit cards. Card issuers commonly slap punitive interest rates as high as 30% on late payers.
3. Combining all of your debts into one simplifies recordkeeping, bill paying and budgeting. It’s easier to keep track of a single payment than to make several payments. This can reduce your chances of missing payments and incurring late fees and interest penalties. Paying on time also helps your credit score.
4. A consolidation loan can let you pay off debt faster. Although the consolidation loan is likely to have a longer term than your existing debts, incurring less interest and fewer fees could save enough to let you make additional payments on your debts.

Consolidation loans work best when you have a good credit score, enough income to make the consolidated payment comfortably and a commitment to paying off your debts. They don’t work as well when you have a high debt-to-income ratio. However, again, there are ways around that.

How High DTI Affects Debt Consolidation

Mortgage lenders generally offer the best terms to borrowers with a DTI below 43%. You can still get a mortgage with up to a 50% DTI, but the interest and other costs will likely be higher.

Unsecured personal debt consolidation loans have tighter DTI limits. It generally takes a DTI of 36% or less to get the best interest rates and other terms. Many lenders won’t loan to borrowers whose DTIs are over 43% at all.

Even if approved, a high-DTI borrower may have to pay more interest on a debt consolidation loan than for the loans being consolidated. This can make a debt consolidation loan a much less attractive tool for managing debt.

Options for Debt Consolidation With High DTI

Is there any way to get a debt consolidation loan with a high DTI? In fact, several options exist, including:

• Get a co-signer. If you have a friend or family member with good credit and a low DTI and will guarantee your loan by co-signing, you can get an unsecured debt consolidation loan with a reasonable interest rate and favorable terms. The potential downside is that you may damage your relationship with the co-signer if you don’t make payments on time. So this is only for borrowers with adequate income who are determined to pay their debts.
• Get a secured loan. It’s important to know the difference between secured and unsecured debt. Most debt consolidation loans are unsecured, meaning you haven’t put up collateral the lender can seize if you fail to make the payments. However, you can get a secured personal loan with favorable terms if you have some collateral, such as an automobile or other asset. This makes you a lower-risk borrower from the lender’s perspective. You, however, take on the added risk of losing the asset you put up as security.
• Use a home equity loan. A home equity loan or home equity line of credit uses the equity in your home as collateral. Terms on home equity loans can be attractive. Again, however, you are taking on added risk. In this case, the risk is losing your home.
• Do a cash-out refinance. Another way to tap home equity is to refinance your mortgage with a loan for more than the amount needed to pay off your existing mortgage. The excess cash can pay off other debts. The low interest rate and easy terms on cash-out refinances can be enticing. Like the home equity loan, however, you risk losing your home if you fail to make payments on your new mortgage.
• Credit card balance transfer. Credit card issuers are constantly coming out with low- and even zero-interest introductory balance transfer card offers for borrowers who apply for new cards. If you have a good credit score and your DTI is not too high, you may be able to get one of these cards and then transfer the balances of high-rate credit cards to the new one. This can save a bundle of interest. However, if you don’t pay off the new card’s balance by the end of the introductory rate period, you could get socked with interest charges anyway.

Lower Your DTI

The least risky way to use a debt consolidation loan to pay off your debts when you have high DTI is also the most time-consuming. That is, to lower your DTI before you take out the loan. Here’s how to do that:

• Pay off your debts. It’s a classic Catch-22, true. But to the extent you can pay off some of your debts, you’ll improve your DTI. Perhaps you could sell a mostly paid-for car, use proceeds to settle the car note and pay cash for a cheaper ride. Another option: Get a loan or even a gift from a friend or family member and pay off one or more of your debts. Otherwise, you can try eliminating unnecessary expenses to free up cash and then apply the classic debt snowball or debt avalanche techniques.
• Earn more income. You can play with the other side of the DTI equation by increasing your income. Take on a second job. Ask for a raise. Switch to a new position that pays more. Work overtime. All can increase your income and improve your DTI.

Debt Consolidation Alternatives

If you just can’t get a debt consolidation loan no matter how hard you look, alternatives still exist. Here are some options you might consider:

• Get credit counseling. Working with a credit counselor to develop a budget and manage spending is a wise move regardless of your approach to reducing your debt. The best choices for credit counseling are members of the Financial Counseling Association of America or the National Foundation for Credit Counseling.
• Sign up for a debt management plan. This calls for contracting with a company that will, first, work with your lenders to reduce the interest rates and forgive late fees and other penalties. Then you’ll send a single monthly payment to the debt management firm, which will make the payments on your loans. Debt management plans also involve fees and require a commitment from you to pay your debts.
• Declare bankruptcy. If you see no way to ever pay your debts, seeking protection under Chapter 7 of the federal bankruptcy code may require selling some of your personal possessions but will effectively end most claims. A Chapter 13 filing gives you more time but still requires you to pay your debts. Either approach means long-term damage to your credit score.
• Try debt settlement. For a fee, debt settlement companies will try to convince your creditors to accept less than you owe in exchange for a lump-sum payment. However, fees can reach as high as 35% of the amount owed. And, unfortunately, many debt settlement offers are outright scams, making this a last-resort option.

Bottom Line

Getting a debt consolidation loan with a high DTI is not easy, but it can be done. It may cost more and take longer, but there are ways to deal with a high DTI. And if you take the long view and work to control your spending and maximize your income, you may be able to reduce your DTI and be a more attractive borrower—or even pay off everything without a debt consolidation loan at all.

Frequently Asked Questions