At some point in your life, you may need to take out a loan. It could be for any reason, such as to get a house, to buy a car, to pay for your education, to start a new business, or even to go on a vacation. When you apply for a loan, however, the lenders have to consider a couple of factors before they can deem you eligible for that loan. One of these factors is your debt-to-income (DTI) ratio.
Debt-to-income ratio simply refers to what you get when you divide your monthly debt payments by your monthly gross income: DTI = Monthly Debt Payments/Monthly Gross Income. Your DTI ratio tells the lenders how much you spend on paying off debts and how much you earn every month. The lower the amount of debt payment, the higher your chances of getting a loan from them.
A good DTI ratio is one that is below 36%. If your DTI ratio is 36% or even higher, that means that you use a large part of your monthly gross income to pay off your monthly debts. This will tell the lenders that approving your loan application may not be such a good idea, and your chances of getting that loan will be very slim.
Be that as it may, there is still some good news: you can lower your DTI ratio. It may involve a lot of time and effort and some sacrifices, but if it lowers your debt, or even leaves you debt-free, all that is worth it. Proven ways to lower your DTI ratio are:
- Ask For A RaiseIt is always wise to discuss your salary with your employer after you have successfully worked with them for a year. Lenders usually want to what you yearly salary figure is, and the higher that figure is, the lower your DTI ratio will be. So, if you have been a stellar employee for the past one year, with an outstanding performance record to your name, asking for a raise is actually a great idea, as this pay increase can help lower your DTI ratio.
- Learn To Budget Better
You need to live your life on a budget. Budgeting is a great way to plan your expenses and curtail them at the same time, helping you pace yourself and eliminating unnecessary spending.
If you have to rush about trying to gather enough money to make the n=minimum payments on your debt at the end of every month, then it is that you either do not have a budget or the budget you have is a horrid one.
Create a better budget to help you plan your expenses, and also have a budget audit to help you see what it is that you are spending on that leaves you stranded at the end of the month. Cut out those things that you don’t need or use, and limit your spending to the basic necessities.
With a good budget, you will realize that you have some extra money at the end of the month after paying off that month’s debts. This extra money can be put aside for emergencies, or even kept to pay off the next month’s debts.
- Use An Effective Strategy To Pat Off Your DebtsThere are many strategies that you can use to pay off your debts. You simply have to pick one that works best for you and stick to it.
To adhere to any strategy that you choose, you need to commit yourself to it and enforce your budgetary principles so that you don’t get tempted to spend on inconsequential matters or items.
The basics of any good debt-payment strategy are to pay off as much as possible in as little time as possible. So, you could decide to make debt payments twice a month, at the end of two weeks. Every two weeks you pay a certain amount of money (set by you), and in the end, you would halve the time it would have taken you to pay off that debt. This not only lowers your DTI ratio, but it effectively clears you of all debts, in the long run, leaving you debt-free.
- Have Good Credit
Your credit score is important when you are trying to lower your DTI ratio and request for a loan. Thoroughly check all your credit card activity: payment histories, disbursements, balances, payoffs, et cetera.
Check and re-check your credit score, and alert your credit card agency if you notice any discrepancies, such as payments charged to your card that you had previously cancelled, or being charged for something you never signed up for.
Having zero discrepancies on your credit lowers your DTI ratio considerably, making you more eligible for a loan.
- Try To Pay More Than The Minimum
The longer you have a debt balance, the more interest it accrues, and the more debt you have to pay off. Paying the minimum amount every month is a trap that leads to a seemingly never-ending future of monthly debt payments.
Create a strategy that will make you pay off as much as possible in the shortest time possible. Paying more than the minimum is important, so as to lower your DTI ratio quickly and make the lenders look more favourably at your loan request.
- Get A Side Hustle
A side hustle, or a second, part-time job. There are basically two ways that you can reduce your DTI ratio: you can get a larger income, or you can strive to incur less debt. Since you are already looking at taking out a loan, then you need to be making more money.
You can become a consultant if you are an expert in your field, consulting independently and getting paid for it without leaving your main job. You can also become an affiliate marketing, creating a website or a blog and promoting goods and services for companies, getting commissions for every conversion you make. You can become a freelance writer, or try out house sitting, or become a certified virtual assistant: the options are endless.