Note that the situation for some debt has changed due to the impact of the coronavirus outbreak and relief efforts from the government, lenders and others. Specifically, the free credit report referenced below from AnnualCreditReport.com is now available every week until further notice. Check out our Student Loan Hero Coronavirus Information Center for additional news and details.
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When considering you for a loan, lenders often look at your debt-to-income ratio, or the measure of your monthly debt payments in relation to your monthly gross income. If your personal debt ratios are high, lenders might see you as a risky candidate for a new loan and reject your application.
In this case, it’s better to lower your debt-to-income ratio before applying for a loan, which you can do by paying down debt or refinancing high-interest loans. Let’s take a closer look at what makes up a debt-to-income ratio and how you can improve yours.
Specifically, let’s answer the following questions:
- What is your debt-to-income ratio, and why does it matter?
- What’s a good debt-to-income ratio?
- How do you find your debt-to-income ratio?
- How can you lower your debt-to-income ratio? 7 steps to take
The debt-to-income ratio definition, commonly known as a DTI ratio, is simply a calculation of your total monthly debts divided by your income. Wondering what is included in a debt-to-income ratio? Here’s how it breaks down.
- Front-end DTI: Your front-end DTI is a measure of your fixed housing related debt compared to your income. This could include obligations such as mortgage payments or mortgage insurance.
- Back-end DTI: Your back-end DTI measures all other debts compared to your income. This could include debts such as student loan payments, credit card debt, personal loans or auto loans. In particular, student loans can increase your back-end DTI significantly if you have a hefty balance.
Since your debt-to-income ratio gives lenders a clear picture of your capacity to meet your debt obligations, a high ratio could make it hard to qualify for new loans. For certain financial products, such as a qualified mortgage, your debt-to-income ratio can only be a maximum of 43%.
There are steps you can take to lower your debt-to-income ratio though, so don’t be discouraged if yours is currently high.
So, what’s a good debt-to-income ratio? An ideal debt-to-income ratio is less than 35% of your income. If your personal debt ratio is higher than 35% but less than 49% you’ll likely want to start looking at ways you can lower it. While a debt-to-income ratio over 35% isn’t necessarily a healthy debt-to-income ratio, it’s also not an emergency — yet. Consider it a warning sign so you can begin taking steps to lower it.
Once your debt-to-income ratio rises to 50% and above, however, you’ll likely run into problems getting more credit, not to mention you could be setting yourself for a financial crisis if something unexpected occurs. If your debt-to-income ratio rises this high, begin taking drastic steps to bring it back down into a healthier range.
At this point you’re probably wondering, “What’s my debt-to-income ratio?” Learning how to find your debt-to-income ratio is quite simple. Here are the steps you can take:
- Add your total monthly bills. Don’t forget to include bills like mortgage payments, alimony or child support, student loan payments, credit card payments and all other debt. Don’t include variable expenses such as groceries or gas in this number.
- Add all sources of monthly income to find your total gross income.
- Divide your monthly expenses by your pretax income to find your total DTI and multiply that by 100 to find the percent.
Here’s an example to show you how this could look. Let’s say your monthly bills come to a total of $2,500. Your monthly income is $5,500. Your debt-to-income ratio would be 45%.
If you’d rather not do the math by hand, use our online debt-to-income calculator to do the math for you:
Debt-to-Income (DTI) Calculator
Learning how to reduce your debt can help you when it comes to figuring out how to lower your debt-to-income ratio. Here are seven strategies that you can begin using to get your personal debt ratio looking more favorable:
1. Target debt with a high ‘bill-to-balance’ ratio
2. Reassess your budget to pay off loans early
3. Stay on top of your credit report
4. Refinance debt to pay it down faster
5. Consider a balance transfer to lower interest rates
6. Negotiate a higher salary
7. Take on a side hustle
When you’re trying to improve your debt-to-income ratio, your biggest priority will be lowering your monthly debt obligations in relation to your income. So it makes sense to target debt not based on its overall size, but on the size of your monthly payments for that debt.
For example, let’s say you owe $1,000 on a line of credit and your minimum monthly payment is $100, so 10% of the debt. At the same time, you owe $500 on a credit card and your minimum monthly payment comes to $125, so 25% of the debt.
Even though the overall debt on your credit card is much smaller, paying it off will do more to improve your debt-to-income ratio because your payment represents a larger portion of the balance.
If you can find room in your budget to devote to repaying some loans now, that can definitely help improve your debt-to-income ratio. With each loan you repay, you’ll lower the debt side of the ratio.
If you have discretionary budget items you can reduce, such as entertainment or dining out, these can be temporarily redirected to repaying your debt. You might feel the pinch of a lifestyle change for a while, but the flip side is you’ll also likely meet your big financial goals, such as getting approved for a mortgage, sooner.
An important part of improving your debt-to-income ratio is making sure the debts listed on your credit report are accurate and that your report is updated with any debts you repay. Consumers can receive a free copy of their credit report once every 12 months from each of the three credit reporting agencies — Equifax, TransUnion and Experian. You can order your report online through AnnualCreditReport.com.
If you notice errors in your credit report, contact the credit reporting agency to correct them. The credit reporting agency must investigate your claims and will typically do so within 30 days. Make sure you also ask the creditor that provided the information to the credit reporting agency, to update your records and verify the information is accurate with the credit reporting agencies.
One of the other popular ways to reduce debt is to refinance outstanding loans. If your credit score has improved since you originally took out your loans, you could qualify for a lower interest rate now. This is true for private student loans or other personal loans you may have taken out.
When you refinance your debt, you take out a new loan at a lower interest rate and use the funds from that loan to repay your old debt. You’ll still have the same original amount of outstanding debt, but you’ll save money with the lower interest rate. The money that you save can be directed toward repaying your loan faster. The sooner you remove debts from your credit report altogether, the sooner your debt-to-income ratio will improve.
If you go this route, don’t forget to factor in costs like origination fees on the new loan or prepayment penalties on the old loan. These could add up and detract from the savings you’d potentially get with a lower interest rate.
Also, although you could get a lower monthly payment by opting for a longer term when you refinance, this could also work to keep you in debt for longer, which means you’d pay more in interest over the life of the loan. If you decide to refinance debt such as student loans, compare refinancing rates online to make sure you’re getting your best deal.
If you’re struggling to pay off credit cards with high-interest rates, one option is to transfer the balance of your high interest cards to a new card with lower interest rates. Many cards offer a 0% APR for an introductory period.
This could help you improve your debt-to-income ratio by getting you out of debt faster, as you wouldn’t be paying anything in interest during the introductory period and could direct more funds to the principal balance on your card.
There are a few important things to keep in mind if you go this route. Firstly, the 0% APR introductory offers are generally only an option for those with good credit. If you do qualify for that promotional offer, keep in mind that you might have to pay balance transfer fees, which could detract from the money you’d save.
Also, make sure you have a plan to repay the balance before the introductory rate expires. After that, you could see a significant interest hike and you’re often required to pay interest on the funds from the date you transferred the balance, not the date the promotional period ends.
While reducing your debt is definitely an important factor when looking at how to lower your debt-to-income ratio, increasing your income is another aspect to consider. Negotiating for a higher salary, or requesting overtime if you work hourly, could be an option for moving the needle when it comes to earning more. Before negotiating for a raise, here are some important aspects to consider:
- Track your accomplishments, hours and contributions. Presenting these to your supervisor in an organized way can help you make a favorable case.
- Research comparative salaries. Use sites like Glassdoor or Salary.com to uncover what people in similar roles are earning in your area. If there’s a true discrepancy, having this information can make the decision more realistic for your employer.
- Practice your pitch. Try your request out on friends or mentors who work in a similar industry. They can help you present your worth in ways your boss is likely to be more receptive to.
Earning more at work might mean taking on additional duties and responsibilities. Look for ways you can help your employer solve problems and suggest these projects as part of the additional work you’ll undertake with a raise.
Another way to increase your income is to take on a side hustle outside of your normal job. A side hustle could be anything from driving for a ride-share or food delivery service to cleaning houses, doing yardwork or using your skills creatively, such as offering tutoring to students.
The added income of a side hustle can help increase the income portion of your debt-to-income ratio, plus you can direct it toward paying your debt, which can eventually help decrease that side of the equation.
Wondering how to find side gigs? Our list of side gig ideas can help you start your research.
Interested in refinancing student loans?Here are the top 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.89% – 6.15%1||Undergrad & Graduate|
|1.99% – 5.64%2||Undergrad & Graduate|
|2.50% – 6.85%3||Undergrad & Graduate|
|1.90% – 5.25%4||Undergrad & Graduate|
|2.25% – 6.64%5||Undergrad & Graduate|
|1.89% – 5.90%6||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|2.15% – 4.42%7||Undergrad & Graduate|
|2.00% – 5.63%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews! |
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2021.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application..
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
5 Important Disclosures for SoFi.
6 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
7 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.15%-4.42% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
8 Important Disclosures for Nelnet.
Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.
Request for the cosigner to be released can be made by the borrower after 24 consecutive, on-time payments (not later than 15 days after the due date) of principal and interest have been made. Borrowers in deferment or forbearance must make 24 consecutive, on-time payments after re-entering repayment to qualify for the release. The borrower must be current on their payments at the time of the cosigner release request and show the ability to assume full responsibility of the loan(s) by meeting certain credit criteria on their own at the time of the request, including, but not limited to, being a U.S. citizen or having permanent residency in the United States, being the age of majority in their permanent state of residency, providing sufficient proof of income, and having no student loans in default.
Hardship forbearance allows you to temporarily suspend payments on your loan(s) while you are experiencing financial hardship. It is offered in increments of two or three months, with a maximum of 12 months available, in aggregate, over the life of the loan. If your loan(s) are in good standing at the time of your request, you will be eligible for forbearance in increments of two monthly payments. If, at the time of your initial request, your loan(s) are considered past-due, you will be eligible for forbearance in increments of three monthly payments. Future increments of forbearance, up to a life-time maximum of 12 months, may be requested upon the completion of making a certain number of principal and interest payments. During the two- or three-month forbearance period, you will not be required to make payments; however, any unpaid interest will continue to accrue and will be capitalized (added) onto your principal balance at the end of the forbearance period. You may continue making payments in any amount without penalty during the forbearance period. Your loan repayment term will be extended by the number of months in the forbearance period.
Refinance Loan Eligibility: You must be a U.S. citizen or permanent resident alien with a valid U.S. Social Security number, and be the legal age to enter into binding contracts in your permanent state/territory of residency, or be at least 17 years of age and apply with a cosigner who is at least the age of majority in their state/territory. Non-residents can apply with an eligible cosigner who is a U.S. citizen or permanent resident alien with a valid U.S. Social Security number. The student loans you refinance must be in their grace or repayment period, and you can no longer be enrolled in school on a half-time or more basis. You must have at least $5,000 in student loans to refinance. You, or your eligible cosigner, must have an annual income of at least $36,000. Approval subject to credit review. Other credit criteria may apply.
Refinance Loan Limits:
Loan Refinancing Risks: Federal student loans include benefits that may not be offered with private student loans. Carefully review any potential benefits that may be lost by refinancing federal and private education loans, such as the loss of any remaining grace periods. To learn more about what to take into consideration when refinancing federal student loans with private education loans, click here
Selecting ‘Get Started’ results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Fixed interest rates range from 2.99% APR (with auto debit discount) to 6.25% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. The fixed interest rate will remain the same for the life of the loan.
Variable interest rates range from 2.00% APR (with auto debit discount) to 5.63% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. Variable rates may increase after consummation. The variable interest rate is equal to the One-Month London Interbank Offered Rate (“One-Month LIBOR”) plus a margin. The One-Month LIBOR in effect for each monthly period (from the first day of the month through and including the last day of the same month) will be the highest One-Month LIBOR published in The Wall Street Journal “Money Rates” table on the twenty-fifth (25th) day (or if such day is not a business day, the next business day thereafter) of the month immediately preceding such calendar month. The Annual Percentage Rate (APR) for a variable interest rate loan will change monthly on the first day of each month if the One-Month LIBOR index changes. This may result in higher monthly payments. The current One-Month LIBOR index is 0.15% as of 5/4/2021.
The lowest interest rate for each loan type requires automatically withdrawn (“auto debit”) payments, a five-year repayment term, and the borrower making immediate principal and interest payments. Not all borrowers will receive the lowest rate. The interest rate and Annual Percentage Rate (APR) may be higher depending upon (1) the credit history of the borrower and, if applicable, the cosigner, (2) the repayment option and loan term selected, (3) the loan type selected, and (4) the highest level of education attained. If approved, applicants will be notified of the rate qualified for within the stated range.
*Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score. **Your actual savings may vary based on interest rates, outstanding balances, remaining repayment terms, and other factors.