5 impacts of your debt-to-income ratio on your loan application

A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that goes towards payment for debts. In other words, a debt-to-income ratio is how much of your income goes to paying debts. It’s like a score to show how much debt you have compared to your income. Think of it as what percentage of your monthly salary is spent on paying off loans.

Lenders like to know that you will not be stranded whenever you have to repay a loan from them, so they tend to make sure that you have a good debt-to-income ratio.

What do lenders consider a good debt-to-income ratio? A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%.

The general idea is that a low debt-to-income ratio demonstrates a good balance between debt and income. That is, the lower the percentage, the better the chance you will be able to get the loan you want.

Since lenders tend to look out for your debt-to-income ratio, here are some ways it can impact your loan application:

Some individuals pay off an allocated amount monthly, to clear up pending debts gotten from one means or the other.

A high debt-to-income ratio indicates that you have too much debt in contrast to your income, which can lower your chances of getting approved for a loan.

If a lender sees that you already have too much debt, you’re not likely to get the loan you’re looking for. We apologize in advance.

Some lenders may use an individual’s debt-to-income ratio as one of the factors to determine the interest rate to be offered on a loan.

The higher one’s debt-to-income ratio, the higher the interest rate is likely to be. This is because the lender takes a higher chance/risk on the individual with a high debt-to-income ratio. The possibility that he or she bails out of loan repayment is much higher due to the already existing debt they’re yet to settle.

Another way an individual’s DTI can impact their loan application is the loan amount they can be eligible for.

Lenders use a person’s debt-to-income ratio to determine the loan amount they can safely lend. With a high DTI, you stand the risk of only being approved for a smaller loan regardless of what you want. To qualify for larger loans, Irorun advises that you clear up all pending debts.

A lender might be willing to lend to you just once regardless of a high DTI. Consequently, they are likely to be reluctant to grant you future loan opportunities, as the lender is hesitant to take such a risk again. Once bitten, twice shy.

Remember, any lender who’s unafraid to lose their money is a red flag.

Having a high debt-to-income ratio will likely mean that you would need a guarantor to help you smooth over any issues you may have with repayment.

Lenders may require you to have a guarantor to serve as an additional source of repayment in case you are unable to make loan repayments on the due date.

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A low DTI makes your loan application a lot easier for you and your prospective lender. If you carry less debt, you can save more money on interest payments, as well as get the best loan option and term from ethical and responsible lenders. Here are a few advantages of a low debt-to-income ratio:

• It helps you qualify for loans with ease
• It indirectly helps you boost your credit score
• It gives you peace of mind
• It tells you if your financial status is good or on-the-verge-of-collapse

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As always, we’re available to answer your questions and provide you with assistance in applying for a loan. Send us a message at support@irorun.com and let’s get you started!