When credit users struggle with debt, a debt consolidation loan is often their best option. These types of loans are generally beneficial to all parties involved as the borrower benefits from the debt relief he/she needs and the lender receives the money owed to him/her. However, the fact that this is a possibility does not mean that it is the best option for you. In addition, as with all types of financial products, not everyone can or will qualify for a debt consolidation loan.
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Why were you rejected for a debt consolidation loan?
Poor credit rating and record
Having a low credit score and a negative payment history will prevent you from receiving a consolidation loan. That’s why we always emphasize the importance of making payments on time and checking your credit score and reports.
Not enough income
In other words, if you do not have the money to repay the loan on time, your chances of being approved for a debt consolidation loan are sadly low. Managing the cost of daily living and not mentioning unplanned expenses plus loan payments means that you must have a regular and reliable form of income, even if you do not have a typical 9 to the 5-year job. A debt consolidation loan is usually paid back between 3 and 5 years, which means that you have every interest in maintaining a healthy income during this time.
No credit history at all
What is the worst? No credit history or bad credit history? Unfortunately, even if the situation is not optimal, none will help you get approved the debt consolidation loan you need. If you are new to the credit market in Canada (because you have always used a credit card under another person’s name) or if you have recently immigrated, not having enough credit history can prevent you from acquiring a consolidation loan. Poor credit history involves a lower credit rating and lack of credit experience. This means for lenders that you are not responsible enough or experienced enough in credit to obtain this type of loan.
Too much debt
The majority of banks and creditors allow individuals to borrow only 40% of their total annual income. This means that your current debt payments, as well as the consolidation loan for which you are applying, cannot exceed 40% of your annual income. If it exceeds 40%, the loan may be refused.
Some lenders require or at least ask for a guarantee when you apply for a debt consolidation loan. This is especially true for consumers who have struggled to cope with their payments for past loans. The guarantee is a way for the lender to ensure that he will not lose the total cost of the loan in case of default.
How to handle rejection
If you have recently been denied for a debt consolidation loan, do not give up yet. Even if you have been rejected once, this does not mean that you can not improve your finances and be accepted in the near future. Follow these recommended steps while keeping your goal in mind and stay positive.
- Find a co-signer for your loan. Even if your consolidation request has been refused, you can be accepted if you have a sufficiently solvent co-signer. A co-signer can be a friend or family member who has very good credit and who agrees to repay your loan if you are unable to do so. This means that the co-signer is held fully responsible until the loan is fully repaid. Lenders are more likely to make loans if you have a co-signer with extraordinary credit because their money is guaranteed.
- Think about using the equity of your home. Using the equity that you have built up by paying off your mortgage, you can get a new loan or line of credit. You can then use your loan or line of credit to pay off your consumer debt. You will always be in debt, but the bottom line is to transfer your high-interest rate debt to a low-interest rate loan or line of credit, save interest costs and get you out of debt faster.
- Live on a budget to avoid other problems. If you wish to reapply consolidation loan in the future, plan a strict budget until then. If you spend more than you earn each month, you will probably sink deeper and find it even harder to get approval. Predict how much you will spend each week in order to have a positive amount (earn more than you spend). This will not only prevent you from getting into more debt but will also help you out.
- Treat the problem. People often ask for a consolidation loan when they do not really need it because their problem is their consumption habits and not their salary. Consolidating loans is not an easy way out of your financial difficulties and will not help you in the long run. Find your problem and work on it, be it impulsive decision-making, misuse of credit cards, a bad deal, non-payment of bills, etc. A problem affecting your finances will not go away, so adjust it by changing your behavior.
- Talk to a credit counselor. If you have been turned down for a consolidation loan and are reading this article and you still feel uncomfortable or uncertain about what to do, talk to a credit counselor about your options. By helping you create a budget and explain all the possible choices, a credit counselor can give you useful tips during this tedious process.
To conclude, it is important to remember that debt consolidation is not an option for everyone because it depends heavily on your financial situation and your lifestyle. The use of a debt consolidation loan has its advantages and disadvantages, but it is important to remember that this will not remove your financial problems or debts. You must find the root of the problem and follow the recommended solutions to overcome this struggle. With determination and severe spending restrictions, you can overcome all your financial problems.