A good credit score does not guarantee a loan from a bank or other financial institution. Banks often turn loan applications from people with a high debt-to-income ratio away. So what is a debt-to-income ratio and why it is so important?
Debt-to-income ratio (DTI) is not a part of your credit score. Instead, it is something banks, and lenders use to determine your ability to repay the loan. If the debt-to-income ratio is high, they will likely reject the loan application.
Total monthly debt service payments/ Total monthly income
= Debt-to-income ratio
If your debt-to-income ratio is more than 36%, you have a high debt-to-income ratio, and the likeliness of your bank approving the loan is substantially reduced. You need to lower your debt-to-income ratio before applying for a loan. Here are some strategies to reduce your debt-to-income ratio.
If the debt amount is more than $10,000, debt settlement is one of the options to reduce the high debt-to-income ratio. In debt settlement program, you pay a lump sum to your creditor, which is lesser than the actual amount you owe.
You can reduce the monthly payments either through debt consolidation or extend the debt repayment schedule. A one-year repayment plan will increase the monthly debt repayment instalment while a five-year repayment schedule will reduce the monthly debt repayment instalment. It’s that simple. However, you need to know that you will end up paying more in total when you extend debt repayment period.
You can buy a credit card to pay one of your smaller debts using cash advance check option. Though the amount you owe remains the same, the monthly debt instalment is reduced after closing one instalment account.
You can consider taking up a side job to increase your monthly income. Any job that increases monthly income will help you remove your debt fast and also reduce your debt-to-income ratio.
A licensed moneylender Singapore is known to provide loans even to individuals with the high debt-to-income ratio. However, you need to have a reasonable credit score. Legal lenders are under the authority of the Registry of Lenders. They are required to operate their money lending business according to laws and rules of the registry. The registry decides several aspects of money lending such as maximum loan amount, fees, and the rate of interest a lender can charge.
The interest rate charged by the money lender is higher than banks in comparison. If you have proper documentation, the licensed money lender in Singapore might process your loan request in a quicker amount of time. Some money lenders may do background checks to assess the lending risk. If you have borrowed money from elsewhere, they might not approve your loan.
The majority of the licensed money lenders Singapore will approve the loan if the new loan does not increase your monthly debt above specific thresholds.