Deleveraging is a long and complex process. Before considering applying for a consolidation loan, start with a debt settlement strategy first. There are many popular ways to repay debt, but we recommend comparing the snowball vs. avalanche strategies as they are tailored to harness your natural motivations to stop the debt cycle as quickly as possible, and not slump yours Creditworthiness cause such as a consolidation loan.
You may have exhausted these options and applied for a loan to streamline your withdrawal process. Unfortunately, although debt consolidation loans are a popular product for many lenders, they are not always easy to come by. If you got rejected, you are probably wondering what went wrong and how to improve your chances next time.
Here are the top four reasons why you might be denied a debt consolidation loan.
You have poor credit or insufficient credit history
Debt consolidation companies want to see a history of good credit practice on your credit report before approving a loan. This may seem unfair as you are looking for a loan to get out of past mistakes, but lenders need to know that whatever they borrow will be paid back to you.
If your credit report shows late payments, see if there is a way to have them removed. Most default interest will drop within a few years. So if you can wait to apply, you may have a higher chance of getting a debt consolidation loan approved.
You may also be denied a debt consolidation loan if you do not have sufficient credit history because lenders cannot have a long enough payment history to ensure you are not at risk. Even if you are new to lending and have already been through so much trouble that you need a debt consolidation package, this can be a big red flag that can lead to a rejection.
You didn’t have enough collateral
Often times, debt consolidation lenders need some form of collateral to secure the loan in case you stop making payments. The amount and type of collateral required is different for each financial institution, so it is important to find out what collateral you need to offer before submitting your application. If you’ve already been declined, check with your prospective lender to see if they can provide some other security of greater value in exchange for the loan. You may need to temporarily give your car the title or add a second position on the title of your home to get approval. These are sizeable assets that you must give up control of. So take the time to weigh the possible consequences (aka what you might lose) if you fail to pay back your loan.
Your income wasn’t high enough to justify the risk
If you’re over-indebted and don’t earn enough to make ends meet, you could face a turnout. Your lender will take into account how much you are charging and the current interest rates you are getting and weigh them against the amount of money you bring in on each paycheck. If the numbers are too far apart, they can tell by the fact that you cannot make your loan payments. If so, try to keep a record of any other income from part-time jobs, gig work, alimony, or child support.
If you don’t have additional sources of income, take steps to increase your income. You can either ask your current employer for a raise or start a part-time job online. The next time you apply for debt consolidation, you will not only increase your income but also make so much that you will not need any debt consolidation at all.
You have applied for too many loans or credit cards
If your credit history shows a recent influx of credit card or loan applications, you could get rejected. It may seem counter-intuitive as there are multiple ways you are trying to get rid of debt, but lenders don’t see it that way. Instead, several recent applications show that not only are you in a desperate situation, but that no other lender seems to think it is a good idea to borrow you from them.
To prevent this from happening, work with lenders that you already have 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 as they won’t get your credit report, but remember that there is a tradeoff not to use your credit history. Payday lenders are not regulated by any regulatory agency so they do not adhere to rules about what they can charge for a loan. Your interest rates and repayment terms are predatory and can drag you even further into debt.
The bottom line
If you have been denied a debt consolidation loan, it is because your application was deemed too risky due to one of the factors above. Talk to your lender about your options and see if you can use other means to prove that you will pay back the loan. If that doesn’t work, you should speak to your current creditors to see if there are any repayment plans you can use to get out of debt faster.