When you apply for a boat loan, your financial history is reviewed by your lender to determine if you are a low-risk candidate. Your financial stability, credit history, and debt all come into question. The gravity of your debt is, in fact, a huge determining factor in the approval or denial of your boat loan application. To be approved for a boat loan, you must have a good debt-to-income ratio; one that is too high will make lenders hesitate. To ensure that you have the best chance of getting a boat loan and the boat of your dreams, here is everything you need to know about debt-to-income ratio.
What is Debt-to-Income Ratio?
Debt-to-income (DTI) ratio is a financial metric that compares a person’s debt payments to their overall income. This ratio is used by lenders to assess an individual’s ability to manage debt and make payments on time. It is a critical factor in determining whether someone is eligible for a loan or credit card.
The DTI ratio is calculated by adding together your monthly debt obligations, such as your credit card payments and mortgage, and then dividing it by your monthly income. Lenders typically use two different types of DTI ratios: front-end and back-end. Front-end DTI ratios only consider a person’s housing expenses (e.g., mortgage or rent payments) in the calculation. Back-end DTI ratios include all of a person’s debt payments, including credit cards, car loans, student loans, and other expenses.
As an example, let’s say you have a monthly debt obligation of $4,000 and a monthly income of $10,000, that will put you at a 40% DTI. Keep this number in mind.
Why Does Debt-to-Income Ratio Matter?
The DTI ratio is an important factor when applying for any type of loan, including a boat loan, because it compares your monthly debt payments to your monthly income. The higher your DTI ratio, the more likely you are to have trouble making loan payments. If your DTI ratio is too high, the lender may deny your loan application or offer you a higher interest rate.
Having a low DTI ratio is important when applying for a boat loan because it shows the lender that you have a strong financial position and are less likely to default on the loan. Lenders want to ensure that you have enough disposable income to comfortably make your monthly loan payments. A low DTI ratio also indicates that you are responsible with your finances and are less likely to miss payments.
The Best Debt-to-Income Range for a Boat Loan
There is no concrete DTI ratio that lenders want to see. Each lender sets their own DTI requirements while also considering other factors. As such, one lender’s acceptable DTI ratio range may be much higher than another. The range your DTI must be will also change depending on which kind of loan you are apply for. For instance, you may find that your DTI ratio can be much higher when you are using a secured loan to purchase a home. The reason is that your home is collateral. If you are attempting to get an unsecured loan, meaning there is no collateral involved, the lender may be much stricter about your DTI ratio.
Ideally, you want a DTI ratio below 43%. Again, there are some lenders who will accept a higher ratio, especially if the other factors they look at—such as your credit history—are favorable. A DTI ratio below 36% is considered excellent, and it shows that the borrower has a good balance between their debt and income.
How to Reduce Your Debt-to-Income Ratio
Being that your DTI ratio is such an important factor when trying to procure any kind of loan, knowing how to reduce it is essential. Having a 40% DTI ratio before adding in the boat loan payment is not the end of the world, but if you can get the DTI ratio down to around 35%, you will be much better off. There are several steps you can take to reduce your DTI ratio and improve your chances of being approved for a boat loan.
Pay Down Existing Debt
One effective way to reduce your DTI ratio is to pay down your debts. Start with high-interest debts such as credit cards and personal loans, which can have interest rates as high as 20% or more. When you pay off these debts, you not only lower your DTI ratio but also improve your credit score. This can make it easier to qualify for a boat loan and get a lower interest rate.
Also, try to pay on time. Late payments do not directly impact your DTI ratio, but they do have a minor influence. Since late payments affect your credit score, and a poor credit score impacts your monthly payments, your DTI ratio could be higher than it needs to be. By paying off debts and paying attention to your credit score, you can start lowering your DTI ratio.
Increase Your Income
Chances are, if you are looking to buy a luxury vessel, your income is not the problem. However, you may want to consider selling any items that you do not use or need, such as an extra vehicle or pieces of a collection that have increased in value. Bringing in a bit more cash can help you put forth a more tempting down payment.
Reduce Your Current Expenses
Cutting back on unnecessary expenses is another way to save money and reduce your DTI ratio. Look for ways to save on your monthly bills, such as canceling subscriptions or negotiating your cable and phone bills. You can also save money on groceries by shopping at discount stores, buying in bulk, and using coupons. By reducing your expenses, you’ll have more money to put towards paying off your debts and lowering your DTI ratio.
Consider Refinancing Current Debt
Refinancing high-interest debt into a lower-interest loan can help you lower your monthly payments and reduce your DTI ratio. For example, you could consider refinancing your auto loan or student loans. This can help you save money on interest and make it easier to pay off your debts. When you refinance, make sure to compare different lenders and choose the one with the best interest rate and terms.
Wait to Purchase Your New Boat
While it may be inconceivable to put off buying your new boat when your head is set on it, waiting is sometimes the best way to get your DTI ratio under control. Remember: you can work on lowering your DTI ratio over time. By following the above steps, you can improve your financial situation and make it easier to qualify for a boat loan. Waiting a few months or a year can make a significant difference when it comes to being approved for a loan. In the meantime, you can continue to pay down your debts, increase your income, and reduce your expenses to improve your DTI ratio.
Optionally, you can apply for a smaller loan. If you want to buy a boat without the best DTI ratio, then you can improve your chances by applying for a smaller loan amount. The downside is that you are going to need more outright.
Consider a Co-Signer For Your Application
It may not help with creditworthiness, but asking someone to be a co-signer is another option if your DTI ratio is too high. A co-signer is someone who agrees to take on equal responsibility for the repayment of the loan. When a co-signer is added to a loan application, their credit score, income, and DTI ratio. This means that if the co-signer has a lower DTI ratio and a higher income, they could improve your chances of being approved for the boat loan.
A co-signer could also lower the interest rate on the loan, which can help reduce the overall cost of the loan. However, it’s important to keep in mind that adding a co-signer to a loan also means that they are equally responsible for the loan repayment. If the primary borrower is unable to make the payments, the co-signer will be responsible for the payments, which could damage their credit score and financial situation.
Also, keep in mind that some lenders do not permit co-signers for boat loans. Be sure to check with the lending institution beforehand to see if you can have someone sign the documents with you. If you do decide to use a co-signer, make sure their financial stability and creditworthiness is exemplary.
Looking to Finance Your New Boat?
Debt-to-Income ratio is an important factor that lenders consider when approving boat loan applications. Should you have a high DTI ratio, you need to work on reducing it prior to applying for a boat loan. That will increase your chances of approval.
When looking to finance a brand new boat, go with a flexible lender devoted to your experience, such as Atlantic Horizon Capital. Our experienced and educated team can help you find flexible financing options that suit your needs and get you the boat you want. Call 609-365-1540 or contact us today to see if you are pre-approved for one of our boat loans. Optionally, you can start filling out a loan application form.