Some people consider a debt consolidation loan to help solve their debt problems. This is typically done to try to lower interest rates and to combine all their payments into one more manageable payment. Debt consolidation service is a great option for some people, but getting a debt consolidation loan isn’t as easy as 1-2-3. Keep reading to learn the top reasons why some people are declined for these types of loans, and what you can do if you’ve been declined for a consolidation loan.
1. Credit Report or Credit Score Problems
There are several different issues that come up regarding your credit report or credit score that will prevent you from obtaining approval for a debt consolidation loan. High balances owing, late debt payments, and debts in collection will all affect your score.
2. No Security or Collateral
Banks and other financial institutions will often ask you for security or collateral when you apply for a loan, especially if you’re having a problem maintaining payments for other debts. They want to make sure that they’ll get the money back no matter what.
3. Not Enough Income
Usually a debt payment loan will cost you more each month than paying the bare minimum for your credit cards. This is because consolidation loans have to be paid off offer a shorter period of time than credit cards, unless you take out a second mortgage on your home. Typically, consolidation loans are amortized over three to five years, which means the payments have to be high enough to pay off the debt within that time. If you don’t have the income to handle making the monthly payments, you’ll be turned down for a consolidation loan.
4. Too Much Debt
Credit unions and banks will usually only permit someone to borrow up to 40 percent of their gross annual income for a debt consolidation loan. This means that they will ad up all your existing loans, mortgages, lines of credit, and credit cards, as well as the proposed loan and see if they exceed 40 percent of your income. This is called the Total Debt Service Ratio. If the new loan will put you over 40 percent, then you will either be turned down for the loan, or you might have to consider taking out a smaller loan.
5. Not Enough Credit History
Your credit history shows lenders how you use credit. Lots of people who apply for debt consolidation loans haven’t had credit in their own name for long enough, and this means they haven’t had enough time to develop a strong credit report score.
6. Find a Co-Signer
You might have a friend or family member who does qualify for a loan and is willing to co-sign the loan with you. This isn’t something you should enter into without consideration, however, since if you can’t afford to make the payment, the lender will go after the co-signer for the payments.
7. Reduce Debt by Solving Your Issues
You’ll need to deal with the issues that put you into debt in the first place. This might include over-spending credit, not enough work, an addiction, or not paying your bills on time. If you have a specific issue that is creating trouble for your finances, it’s best it you address that before going after a debt consolidation loan. Otherwise, that debt won’t help for long.
8. Live on a Budget
You will need to learn to control and plan your spending so you can control your debt. This can help you from getting into more debt and can even help dig you out of the debt you already have.
9. Put the Debt on Your Mortgage
You can add your line of credit and credit card debt to your mortgage once in a while. This is only possible, however, if you have enough equity in your home.
10. Talk to a Credit Counsellor
A professional, non-profit credit counsellor can help identify your problem and can help you get back on track financially.