When you apply for a loan, lenders will often consider your debt-to-income ratio when they decide whether to approve you. That’s why it’s a good idea to understand what it is, how it can affect your eligibility for a loan, and how to calculate it. Here’s what you need to know about your debt-to-income ratio.
What is the debt-to-income ratio?
Your debt-to-income ratio compares how much debt you have with how much income you have. You can think of it as what you owe vs. what you earn. It’s usually expressed as a percentage and shows how much of your monthly budget is used for debt payments.
How can my debt-to-income ratio affect my loan eligibility?
Lenders look at your debt-to-income ratio when you apply for a loan because it helps them determine whether you can manage additional monthly payments. It also gives them an idea of how likely you may repay a loan on time. The lower your debt-to-income ratio, the better your chances may be of getting approved for a loan with more favorable terms.
How to calculate your debt-to-income ratio
Follow these steps to calculate your debt-to-income ratio:
1. Add up your monthly debt payments
List all your monthly debt payments and add them up. Your debt payments may include your mortgage, car loans, student loans, personal loans, and credit card payments.
2. Divide your total monthly debt payments by monthly income
Figure out your gross monthly income, or the amount you earn every month before things like taxes, insurance, and Social Security are taken out. Then, divide your total monthly debt payments by your gross monthly income.
3. Multiply the amount by 100
Take the answer you get from step two and multiple it by 100. This will give you your debt-to-income ratio as a percentage.
How to lower your debt-to-income ratio
If you’d like to lower your debt-to-income ratio and increase your chances of getting approved for a loan, here are a few tips:
1. Pay off your existing debts
Do your best to pay off the debts you owe. The debt snowball method, which focuses on paying off your smallest debts first, can help keep you motivated. If your goal is to save the most money in interest payments, however, the debt avalanche method may be a better option. This debt payoff strategy prioritizes the debts with the highest interest rates.
2. Don’t take on too much new debt
While it may be tempting to take out a loan every time you want to make a purchase you don’t have enough cash for, doing so can increase your debt-to-income ratio. Only apply for credit when you absolutely need it and avoid unnecessary new debt as much as you can.
3. Get a side job to earn extra money
If you wish you had a bit more cash every month to pay down debt and buy what you need, a side job can be a good way to earn some extra income and reduce your debt-to-income ratio. You can deliver food, drive people around, babysit, tutor, or sell items you no longer want.
Find out if you’re eligible for an Advance America loan
Advance America considers many factors when making a loan approval decision, so you may still get approved if you don’t have a great debt-to-income ratio. We offer payday loans, installment loans, title loans, and lines of credit. You can apply online from the comfort of your home in just a few minutes, and you may get a quick or instant approval decision. If approved, you may receive the funds in your bank account the same day you apply or within 24 hours. Visit Advance America today to learn more.