Getting out of debt is a long, complex process. Before you consider applying for a consolidation loan, start with a debt repayment strategy first. There are many popular ways to repay debt consolidation Perth, but we recommend comparing the snowball vs. avalanche strategies as they’re tailored to use your natural motivations to stop the cycle of debt as quickly as possible and won’t cause a dip in your credit score the way a consolidation loan will.
You may have exhausted those options and applied for a loan to streamline your payoff process. Unfortunately, while debt consolidation loans are a popular product for many lenders, they aren’t always easy to get. If you’ve been denied, you’re probably wondering what went wrong and how you can improve your chances next time.
Here are the top four reasons you could be denied a debt consolidation loan.
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You have a bad credit score or not enough credit history
Debt consolidation companies will want to see a history of good credit practices in your credit report before approving you for a loan. That may seem unfair since you’re looking for a loan to get out from under past mistakes, but lenders need to know that whatever they lend you will get paid back.
If you have any late payments on your credit report, see if there’s a way to have them removed. Most late payment marks will fall off within a few years, so if you can wait before applying, you might have a higher chance for debt consolidation loan approval.
You may also be denied a debt consolidation loan if you don’t have much of a credit history because lenders can’t pull a long enough payment history to ensure you won’t be a risk. Also, if you’re new to having credit and are already in enough trouble that you need debt consolidation, it could be a big red flag that may lead to denial.
You didn’t have enough collateral
Debt consolidation lenders will often require some type of collateral to secure the loan should you stop making payments. The amount and type of collateral needed vary for each financial institution so it’s important to ask what collateral you’ll need to offer before sending in your application. If you’ve already been denied, contact your potential lender to ask if there’s a way you can provide something else as collateral that’s higher in value in exchange for the loan. You might need to temporarily hand over the title to your car or add a second position on the title of your home to get approved. Those are substantial assets to hand over control of, so take time to weigh the potential consequences (AKA what you could lose) should you not be able to pay back your loan.
Your income wasn’t high enough to warrant the risk
If you’re well over your head in debt and aren’t making enough to make ends meet, you could face rejection. Your lender will take into account how much you’re requesting and the current interest rates you’re receiving and weigh them against how much money you bring in with every paycheck. If the numbers are too far apart, they could see that as you not being able to make your loan payments. If this is the case, try to pull records of other income from side jobs, gig work, alimony, or child support, for example.
If you don’t have any additional income sources, start taking steps to increase your income. You can either ask your current employer for a raise or start a side hustle online. Not only will increasing your income give you better financial records the next time you apply for debt consolidation, but you may even be able to earn enough that you won’t need debt consolidation at all.
You’ve applied for too many loans or credit cards
If your credit history shows a recent influx of credit card debt consolidation program or loan applications, you could be denied. It might seem counterintuitive since you’re trying multiple avenues to help get rid of debt, but lenders don’t see it this way. Instead, multiple recent applications show that not only are you in a desperate situation, but no other lenders seem to think it’s a good idea to let you borrow from them.
To prevent this from happening, work with lenders you already have existing relationships with, as they may be more willing to add another line of credit or loan to your accounts. If they don’t seem interested, you can go through payday or hard money lenders since they don’t pull your credit report, but keep in mind that there’s a trade-off to not using your credit history. Payday lenders aren’t regulated by any governing body so they’re not beholden to any rules for what they can charge on a loan. Their interest rates and repayment terms are predatory and may even drag you further into debt.
The bottom line
If you’ve been denied a debt consolidation loan, it’s because your application was seen as too risky due to one of the factors above. Talk with your lender about your options and see if there’s another way you could provide proof that you’ll repay the loan. If that doesn’t work, consider talking with your current creditors to see if there are repayment plans you can use to help get out of debt faster.