By Christi Posner
When people begin to experience financial difficulty, they often look at debt consolidation loans as a way to solve their debt problems. They do this in an effort to lower their interest rates and combine all of their payments into one manageable monthly payment.
For some people, doing this is a good idea. However, getting a debt consolidation loan isn’t as easy as many people think.
Here we outline the top 5 reasons why people are declined for debt consolidation loans. After finding out why, you can also read what to do after you’ve been declined for a consolidation loan.
1. No Security for Debt Consolidation Loan
Financial institutions often ask for security or collateral when applying for a debt consolidation loan, especially when someone is having difficulty managing all of their payments. They want to ensure that no matter what, they will get the money back that they have lent out.
So what if you don’t have anything to offer as collateral? Many people resort to using a credit card to pay off other debts at 20% interest. Others apply for an unsecured loan from a finance company at 30% or higher. But if you’re trying to reduce debt, odds are these routes won’t get you ahead very quickly since a large portion of your debt payment will go straight to the interest, and barely any to the principle.
2. Problems with Credit Report and Credit Score – Debt Payment Troubles
There are many credit report and credit score issues that can prevent people from being approved for debt consolidation loans. Late debt payments or debts in collections hurt people’s credit scores. High balances owing can compound this problem. With so many variables, it’s best to read through a detailed explanation of how your credit score is calculated.
3. Not Enough Income to Qualify for a Debt Loan
Usually a debt loan payment costs more each month than paying just the minimum payments on credit cards. By the time someone realizes that they could benefit from a consolidation loan, they may only be able to make the minimum payments on their credit cards and not a penny more.
Credit card minimum payments are so low that it can take a number of decades to pay off a credit card balance, and that’s only if you stopped using the card while making the payments. Consolidation loans cannot be paid off over a long period of time unless they are secured by your home (this would be called a second mortgage). Consolidation loans are usually amortized over 3 to 5 years. This means that the payments have to be high enough to pay the loan off in 3 to 5 years.
If your income can’t handle that kind of a payment, you could be declined a consolidation loan.
4. Not Enough Credit History in Canada
Your credit history shows how you use credit in Canada. Many people who apply for debt consolidation loans have not been using credit in their own name for very long. It takes time for a strong credit report score to develop, so not having a long credit history may work against you.
Another aspect to this is having credit available that you don’t use. If you have a credit card tucked away for safe keeping, you should know that you need to use it responsibly to build a credit history; just having it doesn’t actually show that you know how to use it.
If you are joint on a loan, know that some financial institutions only report information about the primary borrower, not any secondary borrowers or co-signers. If you want to see what your credit history looks like, you can request it from Equifax or Trans Union for free.
5. Too Much Debt
Banks and credit unions will usually only allow you to borrow up to 40% of your gross annual income for a debt consolidation loan in Canada. This means that if you ask a bank for a loan, on paper they will add your proposed loan to your existing debt payments (these are your payments on your existing loans, credit cards, line of credit or mortgage) to see if together they exceed 40% of your income (they call this measurement your Total Debt Service Ratio or TDSR). If the new loan puts you over 40%, then you will have to consider applying for smaller loan or no loan at all.
Solutions Available When Declined for a Debt Consolidation Loan
If you have been declined for a debt consolidation loan or if you are wondering what someone would do if they are trying to overcome financial problems and are turned down for a consolidation loan, find some answers in the conclusion of this article, the Top 5 Solutions When You Are Declined for a Debt Consolidation Loan.