Debt consolidation: the basics
Debt consolidation means taking all your debts and putting them in one place. A bank grants you a loan. This single loan is used to repay all your debts, all at once. After that, instead of having to pay multiple creditors every month, you make a single payment to your bank. This makes your debt easier to manage. The other major advantage is that the interest rate for your bank loan is often much lower than the interest on your other debts, especially if you have credit card debt.
The challenge with debt consolidation is making sure you are very disciplined with your spending, and that you make your monthly payment on time. Sometimes, people make their consolidation loan payments, but then get into credit card debt again. This doesn’t really help the situation.
The hard part: Banks don’t grant consolidation loans to everyone. They may refuse your application, for one or numerous reasons.
In short, consolidation might be an option if you have good credit and a stable, well-paid job. You must also prove that you are disciplined and can pay on time, while not accumulating more debt.
4 reasons why your bank may refuse to lend you money
Reason 1: You have too much debt for your income level
To consolidate your debts, you need to have a high enough monthly income to be able to easily make the monthly payment for your consolidation loan, which is calculated based on the interest rate and how long you plan to take to pay off the loan.
Use our debt ratio calculator to see if you have too much debt for your income. If your ratio is over 35–40%, there’s a good chance your bank won’t want to grant you a loan. But if your ratio is lower than 30%, consolidation might be able to get you out of debt for good!
Maybe you’re able to make all your payments every month, but you’re tired of making dozens of different payments to different creditors. If so, then consolidation is something you should consider. It can be a great way to make life simpler.
Reason 2: You have a bad payment history
This doesn’t just include your credit cards, lines of credit and loans. It also means payments to service providers (for example, your cable and phone bills). Are you having trouble paying your bills?
Not being able to pay your bills has a significant impact on your credit rating. It gives lenders a bad impression. And it’s one reason a bank will refuse your consolidation loan application, since the bank will consider you at risk of not repaying the loan.
Reason 3: You can’t or won’t provide a guarantee
Some banks will only grant a consolidation loan under certain conditions. For example:
- Providing a guarantor (someone who agrees to pay for you if you don’t make your payments)
- Putting up collateral (like your house or car)
- Turning in your credit cards
- Not taking out any other loans
If you’re not ready or not willing to accept the bank’s conditions, they might simply decide not to lend you money.
Reason 4: You don’t have a stable job or you don’t make enough money
To make sure you are able to repay the loan, the bank will ask about your job and your income. Do you have an unstable job, with a minimal salary? If so, the bank probably won’t want to lend you money.
What are your options if your debt consolidation application is refused?
You can always go the private route and borrow from a private lender. But it’s risky… Private lenders often have very high interest rates. And conditions that aren’t in your best interest. That’s not counting certain private lenders who do not respect the law and engage in questionable practices.
To avoid making the situation worse, contact a Licensed Insolvency Trustee. The trustee will guide you and find a solution that is truly right for your situation. Bankruptcy is not your only option. With a trustee, you’ll have peace of mind knowing the solutions you’re being offered are tried and tested.
