If you’re saddled with too much debt, a consolidation loan may seem like a way out. But lenders are picky when it comes to giving out these loans.
Debt consolidation seems enticing because it allows you to lower your interest rate, boost your credit score, and make one easy payment on your debt. Although it sounds like a great idea, it can be disheartening to be turned down for a loan.
Before you apply for a debt consolidation loan, you should know some of the common reasons why lenders sometimes reject these applications. Here are 6 reasons why your lender could reject your application.
1. Low Income
Lenders want to know if you make enough money to handle a loan. They are unlikely to offer you a loan if you’re struggling to make ends meet.
If they believe you won’t be able to pay back your loan in a timely fashion, your chances of approval are low. They expect you to be able to manage your everyday expenses, your bills, and your loan payment.
They typically require you to have some sort of regular, reliable income. Most lenders expect you to repay a consolidation loan in 3 to 5 years.
If you are hoping for a consolidation loan, make sure you have a steady source of income before applying.
2. Your Credit Score
Your credit score indicates how you’ve handled debt in the past. A low credit score makes you more of a financial risk in the lender’s eyes.
If your score is low, your chances for a loan approval are low, but not impossible. There aren’t any quick fixes for a low credit score.
Some tips for raising your credit score include:
- Making credit card payments on time
- Opening a secured credit card
- Keeping old accounts open
- Having more than one source of credit
A solid credit score isn’t the only factor that determines eligibility for a consolidation loan. But a low credit score may disqualify you for a loan with some lenders.
If your consolidation loan has been denied, there are other options for debt resolution. At Debthunch we help people just like you find solutions to their debt problems every day.
3. Outstanding Debt
In addition to your income and credit score, lenders will also look at your outstanding debts before approving a loan. If you have too many debts, including student loans, this can affect your eligibility.
Most creditors will only allow you to borrow up to 40% of your annual income. This means your debt payments and consolidation loan cannot exceed 40% of your annual income.
If this amount is greater than 40%, the lender may reject the loan or qualify you for a lesser amount. You can determine your debt-to-income ratio by totaling your monthly debt and dividing the total by your monthly income.
Remember, even if your debt consolidation loan is denied, there are other avenues of debt resolution that may be a better option for you.
4. Mistakes or Missing Information
In some cases, an innocent mistake on your loan application could result in a rejection. It’s easy to make a mistake by entering a wrong number, misspelling your name, or failing to provide the right documentation.
These types of mistakes can prevent a lender from considering your application or finding your credit information. Whenever you fill out a loan application, have the necessary information at hand and check back over the application to look for errors.
Be sure to fill out the application correctly and make sure you provide the lender with any requested documents or information. You don’t want a simple mistake or omission on your part to be the reason a lender denies your consolidation loan.
5. No Credit History
A poor credit history can keep you from getting a loan, but so can an insufficient credit history. If you haven’t established your own credit or you’ve used credit cards in someone else’s name, it can affect loan eligibility.
A low credit history signifies a lack of experience handling debt. Lenders want to see that you’ve been responsible with paying your credit card bills, car payments, or home loan before qualifying you for a consolidation loan.
Some lenders require you to have up to three years of credit history before they will consider approving this type of loan.
To start establishing credit, you may want to apply for a credit card and demonstrate regular payment before applying for a debt consolidation loan.
6. No Collateral for a Debt Consolidation Loan
Some lenders ask for proof of collateral when you apply for a consolidation loan. This is a way for the lender to ensure some repayment if you default on the loan.
They may require some form of collateral if you’ve had some credit problems or repayment issues with past loans. For lenders to approve your loan, they must feel certain they will not lose the cost of the loan.
Other Debt Resolution Options
When you know the reasons why a lender might reject your debt consolidation loan application, you can plan ahead for a favorable outcome. And there are other options for debt resolution.
If your application for a consolidation loan was denied, don’t give up. Depending on your unique financial situation, you may be eligible for a personal loan, line of credit, or mortgage refinance to help you consolidate your debt.
One of these options may be a better solution for you. And each of these options allows you pay one monthly payment as you pay down your debt.
If you’re looking for a solution to your debt trouble, we’d love to help you. Fill out our form to see how we can assist you. Fill out our form to see how we can assist you.
