Have you been Denied a Debt Consolidation Loan by a lender? Under the right circ*mstances, a debt consolidation loan can be an excellent solution for dealing with debt problems. You can merge all your debts under a single loan, save on interest costs, and pay off your balance sooner.
Most debt consolidation loans are a type of personal loan where you make fixed monthly payments over one to five years. Other popular ways to consolidate debt include a home equity line of credit and a balance transfer credit card.
However, debt consolidation loans aren’t freely available to everyone.
Perhaps you’ve approached numerous lenders only to have your application swiftly rejected. Not surprisingly, it can be frustrating and demoralizing, especially if your current debt payments are straining your budget.
In this article, we’ll outline the most likely reasons you were denied a debt consolidation loan. We’ll also provide tips for improving your chances of qualifying for one and review alternative solutions.
Top reasons your debt consolidation loan application was rejected
Low credit score
A low credit score is a major red flag from lenders’ perspective. In Canada, credit scores range from 300 to 900. The lower your score, the less likely you are to obtain a debt consolidation loan.
Each lender has minimum credit score requirements for loans they issue. If yours falls below this threshold, your chances of getting approved for financing are slim.
While standards vary from lender to lender, you typically need a credit score of at least 650 to qualify for a debt consolidation loan. To get access to the best rates and terms, you’ll need a score of 700 or higher.
Some lending institutions may be willing to grant you a loan if you have poor credit (a score below 600). However, to compensate for the risk they assume in lending to you, by assigning you an excessively high interest rate. Unfortunately, this defeats the primary purpose of getting a debt consolidation loan: to reduce your interest costs.
Factors that can negatively impact your credit score include late payments, high credit utilization, accounts sent to a collection agency, and loan defaults. All these details, and more, are listed in your credit report, which lenders will review when assessing your creditworthiness. They’ll decline your application if they don’t like what they see.
Low or unreliable income
An inadequate income is one of the most common reasons you could be denied a debt consolidation loan.
Lenders will compare your monthly earnings to your day-to-day expenses and debt payments. In doing so, they can determine how easily your can cover your financial commitments at your income level. If they believe you don’t earn enough to make steady payments on your loan, they’ll turn down your application.
Let’s say that you’re self-employed or do seasonal work. In that case, lenders may deem your income to be too unstable for you to cover your monthly debt obligations.
Sparse credit history
A sparse credit history is better than one riddled with missed payments and loan defaults. But it can still prevent you from qualifying for a debt consolidation loan.
Without a credit history of reasonable length, lenders have no track record from which to draw clues about your payment habits and ability to handle debt. As a result, they cannot assess the risk of granting you a loan.
Since lenders’ business model hinges on minimizing risk, they may be unwilling to take a chance on you. While you may have top-notch money management skills, it’s tough to demonstrate proof of them if you lack a meaningful credit history.
Lack of collateral
Lenders may reject your loan application if you have no asset to offer as collateral. A loan backed by an asset is known as a secured loan.
Essentially, your asset functions as an insurance policy for the lender. If you fail to repay your loan, they can repossess the asset, sell it, and use the proceeds to cover the balance.
Assets you can offer as security include your car, the money in your savings account, and your home equity.
High debt
Lenders are concerned about lending substantial loans to borrowers with considerable debt obligations.
Suppose you want to consolidate a sizable chunk of credit card, line of credit, and payday loan debt. In that case, your lender may lack confidence in your ability to repay what you owe.
If you have a high debt-to-income ratio, the risk of defaulting on your payments is high. From the lender’s perspective, they would take on a tremendous amount of risk by assuming debts you owe to other creditors. If you’re already struggling to keep up with your payments, who’s to say things will improve once you combine your debts under a new loan?
Insufficient home equity
Home equity is a critical factor that lenders evaluate if you intend to consolidate your debts through a HELOC.
To be eligible for a HELOC in Canada, you must hold between 20% and 25% equity in your property, depending on your lender’s requirements. Some lenders may require more, especially if your home is located in a rural area.
These limits serve as a safety net for lenders. If you default on your payments, they can repossess your home and sell it to recover their loss. As a result, without adequate home equity, lenders will be unwilling to approve you for a HELOC.
How to improve your chances of qualifying for a debt consolidation loan
Increase your credit score
Boosting your credit score is one of the surest paths to getting approved for a debt consolidation loan. It’s one of the most critical factors lenders consider when deciding whether to accept or reject your application.
You can elevate your credit score by making timely debt payments, keeping your credit utilization low, reducing your existing debt, and minimizing the occurrence of hard inquiries.
Earn more
A higher income will make you a less risky candidate for lenders, as you’ll have sufficient money to cover your monthly payments. Consider taking up a side hustle or applying for a part-time job. Also, review your budget to see if there are areas where you can cut costs.
Find a co-signer
Another option is to ask a family member or friend to co-sign your loan agreement. The role of a co-signor is to step in and assume responsibility for your payments if you default on your loan.
However, defaulting on your loan may strain your relationship with your co-signor. It may also damage their credit and expose them to lawsuits from your creditor. Consider carefully the risk of co-signed loans before pursuing this option.
What to do if you’re unable to get a debt consolidation loan
So, what can you do if you fail to qualify for a debt consolidation loan?
The first thing to realize is that a debt consolidation loan isn’t a magic solution to solving your debt problems. In fact, for many people, it’s a trap.
If you’re already experiencing severe issues in managing your debts, consolidating them under a brand-new loan won’t improve your condition in any significant way.
For example, with poor credit, you may only qualify for financing at the same (or higher) rate you’re paying on your current loans. You’re only exchanging one type of debt for another with little or no benefit.
Here are some alternative options to explore to tackle your debts.
Debt management plan
A debt management plan (DMP) combines your existing unsecured debts into a single monthly payment, much like a debt consolidation loan.
However, the process doesn’t require you to obtain a new loan. Instead, a credit counselling agency negotiates with your creditors on your behalf to eliminate or reduce you interest charges. They’ll also help to create a new monthly payment schedule to pay down your debts, typically three to five years in length.
You can include most unsecured debts in a DMP, including credit cards and unpaid bills. However, CRA tax debt and student loans don’t qualify for inclusion.
Unlike a debt consolidation loan, you don’t need a high credit score to enroll in a DMP program. Plus, you also gain access to complimentary financial coaching sessions, and there’s usually no limit to the amount of qualifying debt you can include
However, a DMP also has some disadvantages:
- The revised payment schedule isn’t legally binding, which means your creditors can opt out of the agreement at any time
- All your lenders must agree to the terms of the new payment plan before your credit counsellor can implement it
- You still have to repay 100% of the debts you owe, plus additional fees to the credit counselling to administer your plan
- You must shut down your credit card accounts, except for one for emergency use
Consumer proposal
A consumer proposal offers another way for you to consolidate your unsecured debts.
It works similarly to a DMP, enabling you to blend your existing debts into one loan, so you only have one monthly payment.
However, unlike a DMP, you can negotiate with your creditors to eliminate a significant portion of what you owe, potentially up to 70% of 80% of your balance. You repay whatever is left over 60 months – and you won’t have to pay any interest charges! Also, you cannot keep a credit card in a consumer proposal.
A consumer proposal is tailored to your budget, allowing you to enjoy a quality life. At the same time, you make progress in paying off your debts. It also binds your creditors to the agreed-upon terms, so you never have to worry about collection calls or lawsuits.
Check out your consumer proposal debt calculator to see how much money you can save each month by enrolling in this program.
How a Licensed Insolvency Trustee can help you deal with your debts
While a debt consolidation loan is a viable option to lessen your debt burden, not everyone can qualify. And depending on your financial situation, it may only worsen your current predicament. You may be better off exploring other options that will allow you to make substantial, long-term progress in reigning in your debts.
A consumer proposal is one such solution, but there are others. If you’d like to learn more about your options, book a free, no-obligation consultation with . Our passionate and experienced team of Licensed Insolvency Trustees can help design a roadmap to conquer your debts and regain your financial freedom.
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