Debt consolidation is one of the many ways borrowers try to manage debt. With it, you can simplify your debts into one payment, while lowering your monthly payments by extending your loan term. Moreover, if you qualify for a rate that’s lower than the debts you’re consolidating, you can save on interest too.
However, qualifying for a debt consolidation loan isn’t easy. If you’ve been rejected for one and are wondering why, we know a few common reasons why. Moreover, we’ll discuss what you can do and what your other options are.
Reasons Your Debt Consolidation Loan Application May Be Denied
There are a few different reasons why lenders might decline your application for a debt consolidation loan. Yes, certain lenders, such as the major Canadian banking institutions do have stricter regulations than others for their credit dealing procedures.
However, all lenders, banks, or otherwise will examine several key points in a borrower’s profile, such as their income, their credit score, and their past and present debt issues.
You Have Bad Credit
This may be an obvious one, but, having a low credit score or a negative payment history may prevent you from getting approved for a debt consolidation loan.
Generally, you’ll need a credit score of 660 (good credit) to qualify. Unfortunately, lower credit scores are a warning sign to lenders that you have a record of not making payments on time.
This is why we always stress the importance of making your payments on time and in full.
Is My Credit Score Bad?
- Excellent (Scores 760+)
- Very Good (Scores 759 – 725)
- Good (Scores 724 – 660)
- Fair (Scored 659 – 560)
- Poor (Scores 559 – 300)
Where Can I Check My Credit Score?
Your Debt To Income Ratio
While many lenders have a minimum income requirement, it means nothing if your current debts are too high.
If you have an income well above the minimum income requirement, but have debts that currently take up a majority of your income, you’ll likely be denied the loan.
The majority of banks and creditors only let individuals borrow up to 45% of their total yearly income. This means that your current debt payments plus the consolidation loan you’re applying for can’t exceed 45% of your yearly income. If it is over 45%, you may be rejected for the loan.
You’re A Newcomer
What is worse? No credit history or a bad credit history?
Unfortunately, neither is the best situation to be in, and neither is going to help get you approved for the debt consolidation loan. If you’ve recently immigrated to Canada, you won’t have any credit history as credit information can’t be transferred. This can prevent you from acquiring a consolidating loan.
While no credit history doesn’t show irresponsibility, it does represent a lack of experience with credit and may signify to lenders that you’re not experienced enough with credit to have this sort of loan.
Some lenders require or at least ask for collateral when you apply for a debt consolidation loan. This is especially true for those consumers who have had trouble keeping up with their payments for past loans. Collateral is a way for the lender to ensure that they won’t lose the entire cost of the loan should you default.
What To Do If Your Application Has Been Declined?
- Check Your Credit Report – Check your credit report to see if there are any glaring negative remarks or errors. These could be potential reasons you’ve been denied the loan.
- Call Your Lender To Find Out Why – To better understand why you’ve been denied, consider calling your lender to find out why. With a clear reason in mind, you can work on resolving that issue before applying again in the future.
How To Get Approved For A Debt Consolidation Loan If You Have Bad Credit?
If you’ve been declined for a debt consolidation loan, don’t give up just yet. There are a few things you can do to get approved:
Find A Cosigner For Your Loan
A cosigner with strong enough credit can improve your chances of getting approved for a debt consolidation loan. A cosigner can be a friend or family member who agrees to make your loan payments if you’re ever unable to. This implies the cosigner is responsible until the loan is fully paid out.
Offer An Asset
Similar to a cosigner, you can offer the lender extra security by offering an asset as collateral. Whether you have a car or a house, either can provide you with the security needed to get the loan.
Alternatives To A Debt Consolidation Loan
Even though you’ve been rejected once, there are plenty of alternative ways to tackle your debt and even improve your chances of approval in the future.
Consider A Debt Consolidation Program
A debt consolidation program sometimes referred to as a debt management program (DMP), is a great option for anyone unable to get approved for a debt consolidation loan. When you enter the program, you’ll work with a credit counsellor who will assess your finances, create a personalized program for you, and even negotiate with your creditors to reduce your interest rates or eliminate any penalties. The main purpose of a debt consolidation program is to pay off your eligible debts in one affordable and easy-to-manage monthly payment.
Consider Using Your Home Equity
While this solution only works if you’re already a homeowner. The idea is to use your home equity to secure a HELOC or home equity loan. You can then use your loan or line of credit to pay off your consumer debts. You’ll still be in debt but the main point is to transfer your high-interest debt over a loan or line of credit with a lower interest rate, save on interest charges, and become debt free sooner.
Get Advice From A Credit Counsellor
If you’ve been declined for a consolidation loan and feel uneasy or unsure about what to do, speak to a credit counsellor about your options. By helping you create a budget and explaining all possible choices, a credit counsellor can offer helpful advice during this process.
Many of these counsellors work for nonprofit organizations and are trained to deal with all kinds of debt situations. No matter your level of debt, they should be able to give you the solution you need, free of judgment.
Pros Of A Debt Consolidation Loan
- Easy To Manage. By consolidating multiple debts life should be somewhat easier to maintain because you’ll have one, hopefully, smaller monthly payment to deal with.
- Avoid Negative Impacts To Your Credit. When you consolidate debt, it’s generally to make it more affordable and easier to manage. That means you’re less likely to miss payments, which can damage your credit scores. Moreover, with every on-time payment, you’ll be able to build a positive payment history.
Cons Of A Debt Consolidation Loan
- You Can’t Consolidate Secured Debts. Not all types of debt can be paid using a debt consolidation loan. For example, credit cards, utilities, and other consumer loans will qualify, but a mortgage or car loan will not.
- Hard To Qualify With Bad Credit. Qualifying for a debt consolidation loan with bad credit is difficult. Debt consolidation loans often require the borrower to have assets to offer up as collateral, in case they default on their new loan payments. If the borrower does default, they could lose their assets as a result.
It’s important to remember that consolidating debt isn’t an option for everyone, as it strongly depends on your financial situation and lifestyle. Using a debt consolidation loan has its pros and cons, but it’s not going to make your financial problems or debt disappear. You have to find the root of the problem and follow the recommended solutions to overcome this struggle. With determination and stern spending restrictions, you can overcome any financial issue you have.