Getting a Loan When You Have a Lot of Debt

Getting a loan with a lot of debt depends on several factors, including the kind of loan for which you're applying, your credit history and the amount of debt you have. Lenders like to be sure that you can pay back your debts and one factor they take into consideration when you apply for a loan is how much debt you have.

Debt-to-Income Ratio

Some loans are dependent on a borrower's debt load. A common measurement of this is a debt-to-income ratio. This is a measurement of how much money you earn each month versus how much you pay for debts. For example, if you earn $5,000 per month and pay $500 in debt payments, you have a 10 percent ratio. The lower the ratio, the more likely you are to receive some loans.

Ideal Ratio

While all lenders make their own decisions about who should receive a loan, many like to see borrowers with debt-to-income ratios below 36 percent, according to Bankrate. If you, for example, have a ratio of 10 percent and are interested in a loan that will bring your ratio to 25 percent, you are likely to get a loan. If you push the ratio over 36 percent, the lender is less likely to give you a loan and will probably give you higher interest rate terms.

Credit Score

A large debt load can also affect your credit score and thus make it more difficult to get a loan. Part of your credit score is based on how much of your available credit you use. For example, if you have a credit card with a $10,000 limit and have a balance of $9,000, this will lower your score. If you have several such cards, your score will likely be lowered significantly, making it harder to get a loan or good loan terms.

Terms

If you get a loan while you already have a lot of debt, the terms may not be competitive. For example, if you apply for a credit card when you already have several cards that are maxed-out or near their credit limit, you'll probably have a lower credit score and will nor be able to get the best interest rates. A creditor with lower debt and a higher credit score would get much better interest rates on any new loan.