This Is How Debt-to-Income Ratio Impacts Your Financial Goals

how-debt-to-income-ratio-impacts-finances

Setting financial goals is a great way to plan for your future. Between budgeting and making regular contributions to your savings account, you can set yourself up for success by being disciplined and intentional with your spending. But there are other factors that contribute to your financial health in the long run.

One of these is your debt-to-income ratio or DTI.

Many borrowers become interested in how to lower debt-to-income ratio when creating a financial plan. Things like student debt can present a huge burden when trying to purchase a home or a new vehicle. Debt-to-income ratio is one of the many factors that contribute to how quickly you can pay off your debt, and how good of an interest rate you can secure on future loans or student loan refinancing.

Before you can begin your path to financial freedom, you’ll need to familiarize yourself with the type of things that can impact your credit score and your ability to pay off your debt in a timely manner.

How to improve debt-to-income ratio, for instance, is a complex issue, but one you easily uncover with a bit of patience and research. Arming yourself with this type of knowledge will allow you to gain a clearer picture of your financial health.

What is debt-to-income ratio?

You’re not alone if you find yourself asking, “What is debt-to-income ratio, anyway?” Debt-to-income ratio is the amount of money you owe lenders divided by the amount of money you earn, i.e. your gross monthly income.

Why is this number important?

For one, it puts into perspective how much of your money you can contribute to paying off your debts. If this number is too high, it’s an indicator that you are borrowing at a faster pace than you can pay back, which makes for an unfavorable loan candidate for some lenders. Learning how to lower debt-to-income ratio can go a long way in paying down your debt faster.

Debt-to-income ratio is important because different types of loans will require this information in order to lend. Some of these may include mortgage loans or vehicle loans.

Mortgage loans and DTI

Purchasing a home is a major goal for college graduates and those already in the workforce. However, to secure a good mortgage rate, one that makes sense for your income level, lenders want to make sure your debt-to-income ratio isn’t too high. A high debt-to-income ratio can result in high finance rates or worse, failure to secure a loan at all. This is the last place you want to find yourself in. By lowering your debt-to-income ratio, you’ll make way for better financial offers that can positively impact your future.

Student loan refinancing and DTI

People who are exploring ways for how to improve debt-to-income ratio sometimes do so because they have chosen to refinance their student loans. Whether this is being done to consolidate debt or to secure a lower interest rate, student loan refinancing can be an important tool to use to improve one’s finances.

How to improve debt-to-income ratio

There are several things you can do if you want to learn how to lower debt-to-income ratio. By doing a bit of research, you can dive deep into your finances and determine ways you can save. Here are a few ways how to lower debt-to-income ratio.

Earn more money

Maybe you love your job but aren’t making as much money as you’d like. To earn more money, you can always invest time in a “side hustle.” A side hustle is a second gig, outside of your full-time job, that brings in extra income. This extra income can be directed toward a separate account to help pay down debt. By taking up a part-time job or side hustle, you’ll be using your free time in a productive way that will ultimately help you live the life you want.  

Pay off debt faster

One way to lower your debt-to-income ratio is to begin paying down your debt at a faster rate. By diverting funds away from certain things, like your entertainment budget, and instead investing them in debt repayment, you’ll owe less money sooner. These are the type of financial sacrifices that can improve your debt-to-income ratio and open new doors for greater financial opportunity. Paying off debt more quickly can pave the way for those big purchases you’ve kept on the back burner while attempting to clear up your financial situation.

Refinance your student loans

If you’re currently paying more than you’d like to when it comes to interest on your student loans, you may have options. For instance, refinancing can help you save money on interest if you can secure a lower rate than you’re paying now. Plenty of borrowers explore this option to help them gain better control of their debt.

From lower financing rates to shorter payment terms, refinancing can carry many benefits, if done wisely. The best part is that you don’t need to wait to get started. The sooner you seriously consider refinancing your student loans, the sooner you can begin saving.

Refinancing your student loans is a wise financial move, but you must do your research to ensure you get the best deal possible. You can do this in a variety of ways, one of which is our Purefy’s Compare Rates Tool, which will help you compare rates through different lenders. With this information readily available, you can determine the lender offer that makes the most sense for your current financial situation, then take the appropriate steps needed to apply for and secure your loan.

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