When credit users struggle with debt, a debt consolidation loan is often their best option. These types of loans are typically beneficial for all parties involved as the borrower gets the debt relief they need and the lender receives the money they are owed.
However, just because it’s a possibility, doesn’t mean that is without a doubt the best option for you. Further, as with all types of financial products, not everyone can or will qualify for a debt consolidation loan.
Check out this infographic to learn which debt management option is best for you.
What Is a Debt Consolidation Loan?
Simply put, debt consolidation is when all of your individual eligible debts are combined or consolidated under one large loan, usually with more favorable terms such as a lower interest rate. The main purpose of a debt consolidation loan is to make the management of your debt easier so that you can pay back the money you owe within a reasonable time frame.
Getting approved for a debt consolidation loan is a great opportunity to pay down your debt and regain control of your finances and unfortunately, not everyone who needs one is able to access this opportunity. Below we’ve compiled the top 5 reasons why some consumers are unable to get approved for a debt consolidation loan.
Why Have You Been Rejected for a Debt Consolidation Loan?
Poor Credit Score and Report
Having a low credit score and negative payment history will prevent you from receiving a consolidation loan. This is why we always stress how important making on your payments on time and checking your credit score and report are.
Not Enough Income
Simply put, if you don’t have the money to pay back the loan on time, your chances of getting approved for a debt consolidation loan are unfortunately low. Managing the cost of daily life and not to mention any unexpected expenses plus loan payments, means you need to have some form of regular and reliable income, even if you don’t have a typical 9 to 5 job. A debt consolidation loan is typically repaid within 3 to 5 years, which means it’s in your best interest to maintain a healthy income during this period of time.
No Credit History at All
What is worse? No credit history or a bad credit history? Unfortunately, while neither is the best situation to be in, neither are going to help get you approved for the debt consolidation loan you need. If you’re new to credit in Canada (because you’ve always used a credit card under someone else’s name) or you’ve recently immigrated, not having enough credit history can prevent you from acquiring a consolidating loan. Low credit history implies a lower credit score and also represents a lack of experience with credit. It signifies to lenders you’re not responsible enough or experienced enough with credit to have this sort of loan.
For more information on no credit vs. bad credit, check out this article.
Too Much Debt
The majority of banks and creditors only let individuals borrow up to 40% of their total yearly income. This means that your current debt payments plus the consolidation loan you’re applying for can’t exceed 40% of your yearly income. If it is over 40%, you may be rejected for the loan.
Learn how to tackle your debt once and for all by checking out this infographic.
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.
How to Deal With Rejection
If you’ve recently been declined for a debt-consolidating loan, don’t give up just yet. Even though you’ve been rejected once, this doesn’t mean you can’t improve your finances and be accepted in the near future. Follow these recommended steps while keeping your goal in mind and remain positive.
- Find a cosigner for your loan. Even though you’ve been declined for a consolidating loan on your own, you may be accepted if you have a cosigner with strong enough credit. A cosigner can be a friend or family member who has very good credit and agrees to make your loan payments if you’re ever unable to. This implies the cosigner is held completely responsible until the loan is fully paid out. Lenders are more likely to give out loans if you have a cosigner with amazing credit, as they’re guaranteed their money back.
- Consider using your home equity. By using the equity you’ve built up by paying off your mortgage you can secure a home equity loan or line of credit (learn more about borrowing with your home equity here). 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.
- Live on a budget to prevent further problems. If you’re going to reapply for a consolidation loan in the future, put yourself a strict budget until then. If you’re spending more than you earn each month you’re more than likely getting deeper into debt and will have an even harder time getting approved. Plan how much you will spend each week so that you’re left with a positive amount (make more than you spend). This will not only stop you from getting deeper into debt, it will help you get out of it.
- Deal with the problem. Often times people apply for a consolidation loan when they don’t truly need one because their problem is with their spending habits, not how much they earn. Consolidating loans aren’t an easy way out of your financial struggles and won’t help you in the long run. Find what your problem is and work on it, whether it’s impulsive decision making, overusing credit cards, poor business, not paying bills on time, and so on. An issue affecting your finances won’t just disappear, so solve it by changing your behavior.
- Talk to a credit counselor. If you’ve been declined for a consolidation loan and read this article and still feel uneasy or unsure about what to do, speak to a credit counselor about your options. By helping you create a budget and explaining all possible choices, a credit counselor can offer helpful advice during this tedious process.
To close, 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 important to remember that 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 in order to overcome this struggle. With determination and stern spending restrictions, you can overcome any financial issue you have.