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While borrowing has almost always been common in Canada, the level of household debt amongst Canadian borrowers has certainly risen over the years. High-interest credit card debt is one of the most often seen forms of debt that people struggle with at one point or another, although debt comes in all shapes and sizes. So, if you’re a borrower and the weight of your debt is becoming too heavy, don’t worry, because there are solutions that can help alleviate a bit of the strain. True, some types of debt solutions may depend on just how bad your level of debt is. For instance, debt management programs, consumer proposals, and bankruptcies obviously cater to scenarios that are far more unmanageable. However, for borrowers out there whose household debt issues have not yet reached the point of being completely unmanageable, but might be at risk of it, debt consolidation loans are a common treatment.
Unfortunately, like any debt solution, consolidation loans come with their benefits and drawbacks. One of the main drawbacks is that they aren’t always easy to get approved for. In fact, potential borrowers must go through a thorough application and screening process before their lender can properly determine their creditworthiness. If a would-be borrower doesn’t possess the necessary qualities that allow them to qualify for a debt consolidation loan, their application will be declined. Then, not only will they be disheartened and out of luck, they’ll still have their debts sitting on their shoulders. So, what else can they do? Is there a way they can get their next application approved? Well, if you’re in a similar situation, or think that you might need a debt consolidation loan soon, but aren’t sure if your application will be approved, keep reading.
Want to learn how to tackle your debt? Check out this infographic.
What is a Debt Consolidation Loan?
A debt consolidation loan works in a similar fashion to most other personal loans. You can acquire one through your lender, which for the majority of borrowers is their bank, credit union, or other financial institution. Once there, you’ll have to fill out an application, wherein elements like your credit, finances, and employment history will be examined to determine how much credit you’ll be approved for if any. If approved, you’ll receive a loan for the amount specific to your case. You can then use the loan to deal with the majority of your debts, and pay it back through installments, usually on a monthly basis. Afterward, theoretically, of course, you’ll have simplified your life by having one overall loan debt to take care of, rather than multiple debts spread out over numerous sources. In other words, you’re putting all your eggs in one basket.
- If properly managed, borrowers will pay less in interest over time, because their other high-interest debts will be eliminated, provided they’re approved for a consolidation loan with a lower rate.
- A borrower’s financial life should be somewhat easier to maintain because they’ll have one, hopefully, smaller monthly payment to deal with.
- Since the borrower’s other debts will be resolved quicker, they may also be able to avoid their credit score being damaged too severely. In turn, they can raise their credit score by making their new loan payments on time and in their full amounts.
- 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 will not.
- 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, which could be their car, house or, other property.
- If not managed properly, a debt consolidation loan can actually end up putting a borrower in even worse debt than they were before. This means that if the borrower continues using credit, on top of their debt consolidation loan, their debt level will grow. Just the same, if they don’t make their new loan payments on time and in full, they’ll be penalized and their debt will get worse.
Why You Might Get Declined
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.
So, before you apply anywhere, take a look at the following factors:
One thing to remember is that lenders are businesses like any other. They need to be certain of two things, that their clients will be able to pay them back and that they’ll make a profit in the process. If your income is so low that the lender feels you won’t be able to keep up with your loan payments, it can lead to your application being declined. At the very least, you may not be approved for as much credit as you need to pay off all your other debts.
Insufficient Credit Score
Your credit score is another significant factor in determining your creditworthiness. A credit score works like a grade point average and ranges anywhere from 300-900. With every credit-related transaction you make, your credit score will rise or drop. Timely, full payments improve a score, while late, short, or missed payments will damage it. According to TransUnion, a credit score of 650 and over will put you in the sufficient range for approval on any common loan or credit product. However, the further below 650 your score is, the lower your chances will be. A low credit score is a warning sign to lenders because it could mean that you have a record of debt problems and or not making payments on time. If your credit score is lower, but you do get approved, you will likely be charged a much higher interest rate, which in itself can cause more debt problems.
Take a look at this infographic for a more in-depth picture of how your credit score is calculated.
Current Debt Level Is Too High
While the point of a debt consolidation loan is so you can pay your other debts, if lenders see that your current debt load is too unmanageable, it can also lead to your application being denied. Once again, lenders want to know, first and foremost that their clients have the ability to pay them back. If you have so much debt that a typical consolidation loan won’t cover it, or it looks like you’ll have little chance of making your payments on time, you might be out of luck.
What To Do If Your Application Has Been Declined
So, if your application for a debt consolidation loan has been denied, or you think it might be when you do apply, there are a few things you can do to improve your chances of getting approved, for this time or the next.
Live Below Your Means and Maintain a Healthy Budget
If your debt level hasn’t gotten too out of hand yet, the first, simplest solution is to make yourself a reasonable budget and stick to it. Every other debt solution is likely going to have a lasting effect on your finances in one way or another, so if you can, try to nip it in the bud before it gets too out of hand. Do what you need to do, downsize to a cheaper living space, buy the no-name items at the grocery store, sell your car and take public transport, etc. Then, dedicate a portion of your savings to taking care of your debts. If it means that your debt load doesn’t get any worse, it will be worth living below your means.
Pay Off Your Highest Interest Debts First
Hopefully, by budgeting, you’ve managed to save a few dollars on the back end. If so, it will certainly work in your favor, especially if you’ve already been declined for a debt consolidation loan, to deal with your highest interest debts as quickly as possible. The longer those debts go unpaid, the worse your debt level will get. As a result, not only will your future chances of approval for debt consolidation loans be lowered, but any type of credit product you desire will get further and further out of reach.
Want to know how to deal with rising interest rates in Canada? Click here.
Get a Friend or Family Member to Cosign Your Loan
If your application gets denied the first time, or you want to improve your chances before you apply at all, find someone to cosign. While you alone might not have the necessary financial factors to gain a lender’s approval, having someone who does qualify just might. So, try asking a trusted friend or family member who has good credit, a reasonable income, and a low debt level to cosign your loan. However, before you do this, it’s very important to know that if you yourself end up defaulting on your payments, the responsibility will fall to your cosigner. If the cosigner also defaults, they could end up suffering the consequences, such as damaged credit, seizure of their assets, even wage garnishment if the case is put in collections and brought to court. So, not only will you both be in debt, but your personal relationship could suffer for it.
Pay Your Debt Using Your Home Equity
While this solution only works if you’re already a homeowner, many borrowers will use their home equity as a way of dealing with their debts. You can open a HELOC (home equity line of credit) through your bank, use it to pay off whatever debts you need, then pay it back in portions, sticking only to a minimum monthly payment if necessary, similar to a credit card. If you don’t have enough equity to pay off all your debts, you can at least take care of some of it, then reapply for another consolidation loan. However, once again, if not managed properly, you might only end up adding to your debt load. In fact, tapping into your home equity is also known as taking out a second mortgage. So, only choose this route if you’re absolutely certain that you can take on the inevitable financial strain that comes with it.
Click here to learn how to borrow using your home equity.
Consider a Debt Consolidation Program
A debt consolidation program sometimes referred to as a debt management program (DMP), is a great option for anyone who is unable to get approved for a debt consolidation loan. When you enter the program, you’ll work with a trained professional 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 with the help of a professional.
Click here for information on entering a debt consolidation program.
Get Advice From a Credit Counsellor, Then Improve Your Credit Gradually
As we mentioned, one of the main reasons why your application was declined or could be declined in the future is because your credit is in bad shape. If so, one thing you can do is speak to a licensed credit counselor. Many of these counselors work for nonprofit organizations, meaning that going to them for advice will cost you nothing. They are trained to deal with all kinds of debt situations. No matter what your level of debt, they should be able to give you the solution you need, free of judgment Then, once you’ve gotten some good, wholesome advice, you can work on improving your credit and dealing with your debt issues one step at a time. The higher you manage to get your credit score, the better your chances will be of approval when you apply. In turn, when your application is approved, a higher credit score will likely earn you a better, lower interest rate.
Be Careful of Hard Inquiries
Every time you apply for a new credit product, debt consolidation loan or otherwise, your lender will examine your credit report, resulting in what’s known as a “credit inquiry”. Soft inquiries occur when you check your own report and will not affect your credit score. Hard inquiries, on the other hand, occur after your lender pulls your report when considering you for credit products and will cause your credit score to drop slightly. So, if you already applied for a debt consolidation loan, your credit score will have been affected, as it will every other time you apply. Because of that, if you were denied the first time, it’s important not to go applying for more loans all over town, as each hard inquiry will damage your credit score.
One of the best things you can do, when it comes to your debt situation, is to be proactive and start dealing with it before it gets out of hand. We know that’s easier said than done for a lot of borrowers out there, but it does go a long way in securing yourself a good financial future. If left unattended, your debts can stay with you for the rest of your life. So, while seeking the advice of a credit counsellor only comes in at #5 on our list here, it’s one of the first things you should do before and after you’re declined for a debt consolidation loan.
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