Lenders don’t hand out loans to just anybody. The more desperate you are for one, the harder it may be to find a bank, credit union, online lender or even credit card company willing to offer reasonable interest rates and terms.
Don’t panic. Take action. Find out why you were denied adebt consolidation loan, and what you need to do to be approved the next time around.
Why Was Your Debt Consolidation Loan Not Approved?
If your debt consolidation loan was rejected, it means lenders felt uncomfortable with your ability to repay what you borrow.
Look at things from a lender’s point of view. They want to know what are the chances you will pay the money back? You may be a great neighbor or wonderful church softball teammate, but do you manage money responsibly? What’s your debt-to-income ratio look like?How’s your credit score?
Understand why those numbers are working against you and how you can make them work for you. Here are a few things to examine.
Low Income
Income is the number that may matter most. Do you make enough money to handle a loan? Or are you just scraping by?
The way a creditor sees it, if your income isn’t enough to pay your existing loans, why should they give you another one?
Too Much Debt
The more debt you have, the more money you’ll need to borrow. It’s a lot easier to get approved for a $2,000 loan than a $20,000 loan.
Once again, your income will come into play in the form of a debt-to-income ratio (DTI). You want to keep your DTI below 36%, meaning only about a third of your monthly income is used to pay off debt.
For example, let’s say you make $3,000 a month, before taxes. If you spend $1,000 a month on debt, you’re looking at a DTI of 33% (1,000 ÷ 3,000 = .33). That’s great!
But say next month rolls around and you rack up a bunch of purchases on your credit card and owe $1,175. Your DTI (debt payments divided by gross income) jumps to 39.2% (1,175 ÷ 3,000 = .392), which is a few ticks above ideal.
Credit Score
A credit score is an indicator of risk. It tells the lender if you’ve been paying bills on time, how much credit you’re using and what the likelihood is that you will repay a loan. Creditors use this number to gauge your financial responsibility and if you’re struggling with debt, especially credit card debt, this could be a problem.
Debt consolidation loans for bad creditare hard to come by. Lenders like to see a credit score of at least 670 for a debt consolidation loan, but probably closer to 700 just to be safe.
It’s not the only factor that matters, but a low credit score could stop you from getting a debt consolidation loan with reasonable interest rates and terms.
No Security
Security is another word for collateral, which is something of value creditors can hang on to, should you fall short of repayment. The two most common types of loan securities are a home or car. Property, investments, even boats, are other forms.
Securities make you less of a risk in the eyes of a lender. They know that at worst, they can walk away with something they can sell to recoup losses.
What to Do If Your Debt Consolidation Loan Application Is Rejected
When you need some financial help and get turned down for a debt consolidation loan, it’s a signal there needs to be a turnaround in your financial life. Don’t be careless with spending or repaying debts.
Make a Budget and Live Conservatively
Spending and saving habits should change so you can make yourself more appealing to lenders and more effective in reaching your goal of eliminating debt.
Step 1 is simple:Make a budget.
Step 2 is more difficult: Stick to that budget!
Making a budget is as easy as downloading one of several budget apps like Mint, Clarity Money or PocketGuard. Those apps are free and extremely easy to use. You enter income and expenses as they occur and let the budget apps do the work of telling where you stand and how close you are to reaching your goals.
Access to up-to-date information available from the apps should make it easier to stay on track, but only if you are diligent about entering the data and committed to changing the way you manage money. Make paying down debt the priority for every paycheck.
Fix Your Credit and Reapply
Everyone wants a second chance and lending institutions might be the leaders in giving you one. They make money by lending, not denying. They want the numbers to work, but you must help them by fixing your credit problems.
Once you design a budget to guide your journey, the next step should be to take direct aim at the areas that lenders check before making a loan – income, credit score and amount of debt. Ask the lender which (or how many) of those three elements were negative factors on your application.
If it’s income, it’s time to seek a promotion or find a part-time job to supplement your income. More money coming in means more money can go out to paying debt.
If it’s credit score, start paying debts on time every month. Pay at least the minimum amount due every month, without exception. That will have the fastest, most positive impact on your score.
If it’s too much debt, review your budget and find areas to trim expenses. Take on a roommate to split costs of rent, utilities, maybe even food. Spend only necessities for at least 1-3 months. Eliminate extras like cable television, dining out, entertainment and clothing. Use those savings to pay down as much debt as you can.
Then reapply for a debt consolidation loan with confidence. Show the lender how you addressed the negatives. Let them see how you’ve changed your financial life. Feel good about asking for a second chance. You’ve earned one.
Speak with a Credit Counselor
It’s hard to figure out exactly what made a lender pass you up. Different lenders have different reasons for choosing who gets approved.
That is why it’s often wise to speak with a credit counselor from anonprofit credit counseling agency, who is trained to assess these sorts of things.
Credit counselors can take a look at your portfolio and point out the red flags poking holes in your credit report. They can even help you form a budget and provide sometips to improve your credit score. All of this will put you in position for better loan terms down the line. Best of all, nonprofit credit counselors are FREE! It doesn’t cost anything to hear their advice.
Work Down Debt
Lenders turn consumers down when they feel the consumer poses too great of a risk. Therefore, if you want to boost your chances of getting a loan, work on improving the factors that made you such a risk in the first place.
Consider turning one of your hobbies into a side gig. The internet has made freelance work very convenient these days. You might not want to add another 12-15 hours to your workweek, but an extra $200-$300 a week may be enough to sway a lender’s decision in your favor.
Consider Other Options
A loan isn’t the only way to consolidate debt. Here are a few other debt consolidation loan alternatives:
- Debt Management Plans:Adebt management plan consolidates credit card debts into one affordable monthly payment at a reduced interest rate. It’s a lot likedebt consolidationwithout having to take out a loan.
- Home Equity:If you own a home and never missed a payment, you probably have some equity to fall back on.Home equity loans andhome equity lines of creditare two tools to consolidate debt. However, if you miss payments, you’re putting your home at risk of foreclosure.
- Debt Settlement:This is a chance to settle your debt for less than what you owe. That’s the upside.The downside of debt settlement is long negotiations (2-3 years), fees, taxes on any debt forgiven, and a major blemish on your credit report for the next seven years.
- Bankruptcy: Make sure you’ve exhausted all other options before filing for bankruptcy. It can provide emotional relief and a fresh financial start, but will tarnish your credit score for seven to 10 years.
- Balance Transfer Credit Cards: The balance transfer card allows you to take the debt from one or more credit cards and apply it to the new card at 0% interest. It’s a longshot you’ll qualify (you need a credit score of 670 or higher) and the 0% rate only lasts from 6-18 months.
As a financial expert with a deep understanding of lending practices and debt management, I can shed light on the intricacies of why debt consolidation loans may be denied and provide comprehensive insights into improving one's financial standing. My expertise stems from years of working in the financial industry, analyzing lending trends, and helping individuals navigate the complexities of debt consolidation.
Let's delve into the concepts mentioned in the article:
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Debt-to-Income Ratio (DTI):
- The article emphasizes the significance of income in the loan approval process, particularly the debt-to-income ratio. A low DTI is crucial for demonstrating financial stability and the ability to handle additional debt responsibly.
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Credit Score:
- The credit score is highlighted as a key indicator of risk for lenders. A credit score above 670 is generally preferred for debt consolidation loans, with an even safer zone around 700. The article underscores the impact of timely bill payments and responsible credit usage on improving credit scores.
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Security/Collateral:
- Security, or collateral, is discussed as a means to reduce the perceived risk for lenders. Having assets like a home or car can make an individual less risky in the eyes of a lender, providing a fallback option in case of repayment issues.
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Budgeting:
- The article recommends creating a budget to manage finances effectively. It suggests using budgeting apps like Mint, Clarity Money, or PocketGuard to track income and expenses, emphasizing the importance of diligence in data entry for accurate insights.
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Improving Financial Health:
- Strategies for improving financial health are outlined, including seeking a promotion or part-time job to increase income, paying debts on time to enhance credit scores, and trimming expenses to reduce overall debt.
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Credit Counseling:
- The article suggests consulting with a credit counselor from a nonprofit credit counseling agency. Credit counselors can assess financial situations, identify red flags in credit reports, and provide valuable tips to improve credit scores—all at no cost.
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Debt Consolidation Alternatives:
- Various alternatives to traditional debt consolidation loans are presented, such as debt management plans, home equity loans, debt settlement, bankruptcy (as a last resort), and balance transfer credit cards. Each alternative is discussed with its pros and cons, offering a comprehensive view of available options.
By presenting these concepts, I aim to provide a thorough understanding of the factors influencing debt consolidation loan approvals and practical steps to address potential issues. If you have further questions or need personalized advice, feel free to ask.
