What is a Good Debt to Income Ratio?
Once you have worked the calculation out, what does this mean? Well, the lower the figure you have, the more affordability you should have too. If you have a ratio under 20%, this will inform a creditor you have excellent affordability and will have enough to cover repayments. Anything higher than 40% can indicate you may be struggling to maintain repayments on existing agreements and any further borrowing may cause financial difficulty.
As creditors may use this to determine who they approve for a loan agreement, it’s important to work this out before applying so you can avoid being declined unnecessarily. The good news is there are some creditors or types of borrowing that will not decide a loan only based on whether you have a good debt to income ratio. However, you will still need to determine you have the funds available from an assessment of your finances.
How to Improve Your Loan to Income Ratio
If you have a high ratio, then you’ll want to see if you can improve this as much as possible. If you are planning to apply for any borrowing products, you may want to see what you can do to reduce this first. Some of the best ways to look at reducing your debt to income ratio is by:
- Reviewing your expenditure and seeing where you can reduce your outgoings. Anything non-essential is where you can reduce spending. You may be able to reduce certain bills such as utility bills to help too.
- Avoiding applying for more borrowing. If you add more debt to your existing figure without earning more, your ratio will grow.
- Pay off any debts that have small amounts outstanding. This will help reduce the number of creditors you have and will free up more funds each month.
- Increase your income. Look at earning more each month either through your regular employment or by looking into ways to supplement your income.
Affording a Debt Consolidation Loan
For those with multiple debts to maintain each month, and their debt to income ratio is high, finding solutions to reduce this issue can seem impossible to find. A suitable option could be to consolidate these debts, helping to reduce the number of creditors needing to be paid. A debt consolidation loan for those with bad credit can turn a difficult situation into an affordable one. As long as you have affordability after reducing your non-essential outgoings, you could then afford to pay the required repayments.
Aiming for a low debt to income ratio is something all borrowers should aim for as it will help make applying for credit in future much easier. However, if you are in a position where your ratio is high and you are looking to reduce this, unsecured debt consolidation loans may still help.
To find out more about debt consolidation loans or working out your ratio, please get in touch.