Most borrowers look at a debt consolidation loan as a guaranteed way to restructure high interest credit card debt. It never occurs to them that they could be denied when they apply, yet it happens more often than you might think.
4 potential reasons for debt consolidation loan rejection
Your debt consolidation loan application could be denied for a variety of reasons. Here are some possible explanations:
- Your income is too low: Lenders want to know that you have enough income to pay your monthly loan payments. There’s a reason why you’re in debt in the first place. That could be due to poor budgeting and spending habits, or it could be that you’re just not making enough money. A loan cannot help you with that problem.
- You have too much debt: Like most credit vehicles, the screening process for a debt consolidation loan involves checking your debt-to-income ratio and total existing debt. If you owe more than you can conceivably pay back in a reasonable time, you may need to explore other options. Lenders will normally reject you if you have excessive debt.
- Your credit score is too low: Your credit score is what tells the lender whether you’re a worthwhile risk for a loan. Your score is calculated using several variables, including your credit payment history, amounts owed, length of credit history, new credit, and credit mix. If you have defaults, charge-offs, or judgements against you, those could bring your score down.
- You don’t have collateral to offer: Many debt consolidation loans are unsecured, so collateral is not usually required. But if you have a low credit score and a lot of debt, the lender may be willing to do a secured loan if you have sufficient collateral. Collateral could be a piece of property you own, expensive jewelry or artwork, or even a vehicle in some cases.
What to do if you’re rejected
If you’re denied a debt consolidation loan, you’ve got some work to do. Since the purpose of the loan was to help get you out of debt, you’re now in a tough situation. You’re not worse off than before, though. At least you know where you stand. Here’s what to do next:
- Create a new budget: Obviously, something is not working. Create a new budget from scratch and try to figure out where you can cut unnecessary expenses like monthly subscriptions and expensive phone plans to give yourself more cash to chip away at your debt.
- Limit your spending: Those takeout meals need to be put on hold. When you’re in this state financially, all extracurricular spending needs to be eliminated, at least for the time being. Separate your spending into “needs” and “wants.”
- Increase your credit score: Continue to make monthly minimum payments on time and stop using your credit cards. That will eventually bring your credit score up. You’ll also want to refrain from applying for any new credit cards or loans.
- Explore debt settlement options: If you’re really in trouble, another option is to explore debt settlement options with your creditors. They may be willing to settle for less than what you owe if you can prove a financial hardship. The remining debt will be charged off, which will hurt your credit score.
By Kevin Flynn
Kevin D. Flynn is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their eight wonderful grandchildren and two cats.