Ravi Chandran
A high debt-to-income ratio makes it harder to secure loans at a reasonable interest rate, but it is not entirely impossible.
By: Hitesh Khan/
When a lender issues you a personal loan, it wants to know you will have the ability to pay it back. A high debt-to-income ratio makes it harder to secure loans at a reasonable interest rate. If you’re carrying a large amount of debt but need a personal loan, consider bringing on a cosigner, choosing a longer lending period, or working with a licensed moneylender of a bank.
Lenders are not necessarily concerned with how much debt you have — they are more concerned with how much debt you owe relative to your income. To calculate your debt to income ratio, divide your monthly obligations – such as mortgage payments, rent, child support, student loans, car loans and credit card payments – by your gross monthly income before taxes. For example, if your monthly obligations are $2,000 per month and your gross income is $4,000 a month, your debt-to-income ratio is 50 percent.
A low debt-to-income ratio means you have a strong flow of income relative to debt and you should be able to pay back a personal loan. Research shows that a good debt-to-income ratio is 35 percent or less.
You still may be able to secure loans with a debt-to-income ratio of 36 percent to 49 percent, but your personal loan options are more limited if your debt-to-income ratio is 50 percent or more.
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Personal loan applicants can increase their odds of loan approval by adding a cosigner or guarantor to the loan. A cosigner or loan guarantor isn’t entitled to the loan proceeds, but promises to pay the lender back if the borrower defaults.
If you have a close friend or family member with a low debt-to-income ratio, ask her if she’d be willing to cosign so that you can secure loans. As long as your cosigner has a low enough debt-to-income ratio, her guarantee may satisfy lenders that are not happy with your debt level.
The shorter the life of your personal loan, the higher your monthly loan payment will be, especially if you are borrowing from a licensed moneylender. You often can opt to lower your monthly payment by increasing the loan’s term and paying it back over a longer period.
If you can prove you have enough income to cover a low monthly payment plus your existing obligations, the lender may be more willing to approve your personal loan application. The catch is that you likely will be charged a higher interest rate for a longer term, and you’ll therefore pay more to borrow the money.
If traditional banks are not willing to give you a reasonable personal loan, talk with licensed moneylenders to secure loans instead.
Licensed moneylenders are more willing to lend for short term, special needs and often have special programs designed for members who need cash fast. If you choose a loan from a licensed moneylender, loan amounts range from $100 up to $2,000. Depending on your financial circumstances and the lender, it may be possible to borrow more through a secured or unsecured short-term loan, sometimes with amounts of up to $10,000 available.
As these loans usually involve borrowing a small amount for a short period, many lenders offer quick and easy applications. Some lenders can also provide instant loan approval and transfer the funds into your bank account within one business day. You typically have between 2 days and 1 year to pay back the money you borrow.
Nobody wants to pay a higher interest rate than he or she has to, so consider the purpose of your urgent loans before applying. Is it for debts or upcoming expenses that require immediate attention, or can the loan wait until you have an opportunity to build up your credit score and receive a better rate?
Only you can answer that question, but at least be sure to ask the question before you rush into getting urgent loans. Urgent loans do ensure that you have alternatives, but be sure to check them out thoroughly. Review the terms to make sure that you understand all the fees and potential charges, and calculate the total amount of money you will pay over the life of the loan.
Choose poorly, and you could be caught in a seemingly endless debt cycle. Choose wisely, and you could be on your way to improving your financial position while rebuilding your credit.
How to Secure a Personal Loan Quickly
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