Income plays an important role in fetching you loans. Getting approval for a student loan consolidation, mortgage, or a car loan is not only dependent on your credit score, but there are other factors also. Credit scores can be a major factor in deciding whether to qualify you for a loan but income also has a prominent role in that process. In many cases, loan requests are rejected due to insufficient income of the applicant. Better know about the debt to income ratio in detail, so that you will be aware of your capabilities in applying for a loan.
Table of Contents
- Debt to income ratio
- Impact of debt to income ratio on credit
- How to lower debt to income ratio
- Concluding thoughts
What is the Debt-to-income ratio(DTIr)?
The debt-to-income-ratio is an important concern for a lender before providing a loan to someone. Lenders check the debt-to-income ratio of the applicant to make sure that the applicant is capable of repaying the loan.
The Debt-to-income ratio is just a comparison made between your monthly income and monthly bills that are seen on your credit report. The debt to income is seen in percentage. If your monthly loan payments take three-fourth of your monthly income then your debt-to-income ratio is 75%.
The debt to income ratio usually depends on a few monthly payments and the below-mentioned factors:
Your monthly mortgage payments
Monthly car payments
Minimum amount due on your credit card
Minimum due on your student loans
Dues on any other forms of loans
The debt-to-income ratio does not depend upon a few of your monthly commitments like Insurance costs, cable bills, Cell phone bills, and utilities.
Impact of debt-to-income ratio on credit
The credit bureaus don’t consider your income in a greater aspect while calculating your credit scores. So your debt-to-income ratio has only less to deal with your credit scores.
But the credit utilization ratio may affect you in loan approvals. Credit Utilization is the outstanding balance on your credit accounts. A borrower with a high debt-to-income ratio may usually have a high credit utilization ratio. The credit utilization ratio should be kept under 30% by any borrower while applying for loans and mortgages. Lowering your credit utilization ratio will effectively help you boost up your credit score.
How to lower debt-to-income ratio
Having a lesser debt-to-income ratio will increase the chances of loan approval. Fixing this ratio can be an expensive task. This task is not very easy. Different payments have different effects on your debt to income ratio. Some monthly payments can lower the debt to income ratio whereas some cannot make any change. For example, a large payment towards your credit card debt will reduce your monthly payment and improve your ratio. However, paying off a large portion of a car loan will not change your monthly bill and as a result, the debt-to-income ratio remains the same.
Focusing on the loans that you can pay off completely may help you lower the debt to income ratio in a larger proportion. This strategy works only if you can pay off the loan completely. So first target small loans that you can pay off easily. Paying off a portion of a large loan will not have any impact on the debt to income ratio.
Multiple Student loans also play a major role in holding back you from improving the debt to income ratio. So better try to consolidate or refinance your student loans. This can actually help you to lower the debt to income ratio. Or taking up the best student loan with better repayment plans and lower interests may help you stay with a better debt to income ratio.
Getting a student loan will be an easy task when you make sure you have a good credit score and a low debt-income-ratio. If you got student loans already and if that makes an important reason for increased debt to income ratio, then better try taking proper actions towards it. You need to plan wisely to eliminate your loans. Decide and pay off the small loans first that will make an impact on the debt to income ratio. Well, paying off loans isn’t enough. Your credit report must be clean, it should show a zero balance. Taking proper steps and reducing your monthly debts will get you to a better position by reducing the debt to income ratio. Reduced debt to income ratio will increase your chances of getting approval on student loans.