Can I get a debt consolidation loan with a high debt-to-income ratio?

What is debt-to-income ratio?

Debt-to-income ratio (DTI) describes the percentage of your gross monthly income (before deductions) that goes towards paying off debt. Lenders use DTI as an indicator of your affordability when you’re looking to borrow credit.

 

What is classed as a high debt-to-income ratio?

The figure that triggers a high debt-to-income ratio differs from lender to lender. As a rule of thumb, a DTI of 50% or over is seen as high risk, between 40% and 49% is moderately risky, and 0% to 39% is very low to acceptable risk.

Put simply, the more of your monthly income that you spend on debt, the riskier you may seem to lenders. 

Does a high debt-to-income ratio affect my eligibility for a consolidation loan?  

It is possible to get a loan with a high debt-to-income ratio, but your options may be limited, and you may face higher interest rates. This is because lenders may see you as a higher risk and question your ability to repay the debt.

You are more likely to need a good credit score to get a loan if you have a DTI of 40% or over. If your DTI is 75% or over, your application could be rejected, or you may need to find a specialist lender.

Tip: Use an eligibility checker to find out your chances of approval before you apply – without affecting your credit score.

How to calculate debt-to-income ratio

Follow these steps to find out your debt-to-income ratio:

1. Add up your monthly debt repayments (such as mortgage payments, car finance, credit cards, loans, overdrafts, child support and maintenance)
2. Divide this figure by your gross monthly income (for example, your monthly wage, pension, or benefits)
3. Multiply by 100 to get a percentage

For example:

• Total monthly debt = £1,000
• £1,000 divided by gross monthly income of £2,000 = 0.5
• Multiplied by 100 = 50% DTI

Will a debt consolidation loan help my debt-to-income ratio?

A debt consolidation loan could help to reduce your debt-to-income ratio if it means you pay less towards your debt each month.

When you consolidate debt, you move some or all your outstanding credit to one place, to make it easier to manage. You still owe the same amount to your creditors, but you could pay less each month towards your debt if you can get a lower interest rate.

You could also reduce your DTI and monthly payments by spreading your loan over a longer period, but this may lead to you paying more in total.

 

How to get a loan with a high debt-to-income ratio

If you have a high DTI, you could increase your chances of getting a debt consolidation loan, if you consider: 

• A smaller loan – to focus on consolidating your smallest debts or those with the highest interest rates. Bear in mind you might not be able to consolidate all your debts with a lower amount
• Applying for a joint loan with someone who has good credit and a low DTI
• Finding an alternative lender or broker that offers loans to people with a high DTI
• Getting a guarantor loan with someone who has good credit and a low DTI. This involves someone you trust co-signing the loan agreement to guarantee that they will cover your payments if you can't.

How to lower your debt-to-income ratio

Consider these tips if you wish to lower your debt-to-income ratio and boost your eligibility for credit.

• Ask creditors to reduce your interest rate – if they agree, this could lead to savings that you could put towards debt.
• Find ways to increase your income – this might be easier said than done, but if you can negotiate a higher salary or find a better paid job, this may improve your affordability for a loan.
• Reduce your outgoings – creating a budget and reducing non-essential outgoings may free up funds that you can use to reduce debts. 
• Correct any mistakes on your credit report – you can raise mistakes with the relevant credit reference agency. For example, a loan that has been repaid but still shows as owing, or a debt that doesn’t belong to you. 
• Use any savings to pay off small debts early - keep in mind that early repayment fees may apply if you clear a loan before the expected end date. 

Secured vs unsecured debt consolidation loans

You need to be a homeowner to apply for a secured loan (or homeowner loan) to consolidate your debts. This is because the loan is tied to your property. Using your home as collateral means you may find it easier to get approved – even if you have bad credit. But your property could be at risk of repossession if you fall behind with the loan repayments (in the worst-case scenario).

You don’t need to own your home to qualify for an unsecured consolidation loan, or personal loan. However, you might need a good credit score to get approved with competitive rates.

Alternatives to debt consolidation loans

If you don’t qualify for a loan or want to look at other options, you could consider:

• A balance transfer credit card - if you only have credit card debt or owe a small amount. A good credit score may be required, and balance transfer fees may apply.
• Remortgaging your home with additional borrowing – this involves switching your current mortgage deal for a new one and releasing equity in your property to pay off your debts. You may end up paying more in total if you increase your mortgage and spread the repayments over a longer period.
• Seeking free, expert debt advice from Money Wellness, StepChange, Citizens Advice, National Debtline, or MoneyHelper.