When you’re overwhelmed by multiple forms of debt, a consolidation loan can offer much-needed assistance
Designed to roll your myriad obligations into a single monthly payment with more favorable terms, these loans can help you get back on your feet and achieve financial stability.
However, they aren’t given out blindly. Lenders will look at various factors to determine your loan eligibility, and a sub-par credit score can cost you.
Have you been denied consolidation loans for bad credit? If so, it can feel like the most ironic twist of fate. You need the loan to organize your finances, meet your deadlines, and get your score back on track, but your current number is holding you back.
The good news? There are steps you can take to help rectify your situation. Read on to learn what to do when the news isn’t in your favor.
1. Understand the Reason Behind the Denial
You don’t have to take a simple “denied” for an answer. If a lender doesn’t approve your application for a debt consolidation loan, you’re within your rights to inquire about the reason why.
Remember: It isn’t in a lender’s best interest to turn down your request for a loan. This is their livelihood and the foundation of their income. As such, they likely have a solid reason for rejecting your request.
When you learn this reason, you achieve two aims. First, you can get some sort of closure on the experience so you aren’t left wondering what you could have done to improve the outcome.
Second, you can also gain insights into how you can improve your odds for next time. In most cases, the short-term issue holding you back can be reversed or improved over time and you can apply again at a later date.
Let’s take a look at a few of the most common reasons why your application for a debt consolidation loan might have been denied.
Your Outstanding Debt Is Too High
A lender specializing in debt consolidation loans will expect you to carry some form of debt. After all, that’s why you need their services in the first place!
However, there comes a point when you’re carrying so much debt that the liability is simply too great for a lender to bear. For instance, you might be paying back hundreds of thousands of dollars in federal student loans.
In this case, remember that a debt consolidation loan doesn’t eradicate your existing payments. It simply combines them and makes them easier to manage. Yet, in turn, you’re now looking at another loan to add to your plate.
If you take out a large consolidation loan in the same amount of your collective existing debts, your credit utilization ratio can skyrocket. This can make it even more difficult to earn a lender’s approval down the road.
Your Income Isn’t High Enough
Even if your debt load is within a lender’s range, your application could still be denied. Why? You might not make enough money.
You can wax poetic for hours about your ability to pay back a loan, but a lender needs to see concrete proof that you’re financially stable. To determine if you can make good on your promise, they’ll look at your anticipated loan payment each month. Then, they’ll compare it to your current take-home income.
The resulting number is known as your debt-to-income (DTI) ratio. If your DTI is 20% or less, your chances of receiving a consolidation loan are solid. On the other hand, if it exceeds 43%, they’re slim to none.
Your Credit Score Is Low
Research shows that nearly one-third of Americans have credit scores lower than 601. This is the threshold that distinguishes fair credit from bad credit.
One of the most common reasons that lenders deny applications for debt consolidation loans is because the applicant’s credit score is too low.
While it might seem like just a number, this score holds a tremendous amount of weight. In short, it tells a lender how reliable you are as a loan recipient. Can you be trusted to pay back the loan in full and on time?
While a low credit score can be a hindrance on your path to approval, it doesn’t have to be a roadblock. There are steps you can take to get your credit back on track, but it will take time. Keep in mind that even if you are approved for a loan, it’s unlikely to have terms and rates that are any more favorable than what you’re already paying.
That said, it’s worth taking the time to get your debt back on track and commit to sticking to a routine repayment schedule. By doing so, you can begin to correct any damage already done to your score.
2. Determine How to Manage Your Debt
Before you start researching your options and planning your next move, it’s important to understand your reality. You still need a way to keep your debt manageable, even if it isn’t through the means you expected.
It sounds almost too simple, but the best place to start is by creating a budget. Until you know where every penny of your income is going, it can be next to impossible to track it and reign in your spending.
The budget doesn’t have to be elaborate or high-tech, but it does need to list every source of monthly income you receive, as well as your fixed and variable expenses.
Fixed expenses are those that you expect and plan for each month, and each one is the same amount each time. These might include your mortgage, rent, or car loan payment.
On the other hand, variable expenses are those that fluctuate from month to month. For instance, these would include entertainment, utilities, groceries, and more. You’ll need to include both fixed and variable expenses on your budget.
If you have any money left over once you subtract your expenses from your earnings, it’s wise to save it, especially at this juncture. Or, you can also apply it to pay down your debts.
Debt Snowball vs. Debt Avalanche
If you follow the debt snowball method, you’ll pay off the debt with the lowest balance first. This means you’ll make all of your usual monthly payments, and allocate any excess funds to that low-hanging fruit. Once it’s paid off, you’ll apply the same process to your next-smallest loan, and so forth.
Conversely, the debt avalanche method centers on eliminating the debt with the highest interest rate first. The idea behind this approach is that when you tackle the heaviest hitter first, the remainder of your debts will be easier to manage.
Neither method is guaranteed to work better than the other, so consider which would best fit your lifestyle and financial goals, and choose from there.
3. Get a Clear Picture of Your Credit
As you start budgeting your money, one of the wisest moves you can make is to partner with a qualified credit counselor.
This expert is well-versed in learning your personal situation, examining your credit part, and helping you chart a clear course forward. They will know the specific steps you can take to help build up your credit score and improve your loan eligibility.
If you qualify, you can often find free credit counseling services provided by local non-profit agencies. When you meet with your counselor, be prepared to share as many details as possible about your current situation.
From your debts and incomes to your expenses and assets, they’ll need to know it all. Then, they can present the facts to you in a clear way so there’s no second-guessing or reading between the lines.
In addition to debt consolidation options, our counselor may also suggest other routes you can take, such as setting up a plan to manage your debt. Along the way, you’ll also learn steps you can take to improve your credit score. Once you implement these steps, you’ll be in a more favorable position to try again.
4. Take Steps to Improve Your Credit Score
Were you denied a debt consolidation loan because your credit score was too low? If so, take the steps necessary to improve it before you apply again.
As detailed, there are three common reasons why a lender might reject your application.
If your income is too low, you can ask for a raise or look for a side gig to supplement it. If you’re carrying too much debt, you can set a budget and apply either the snowball or avalanche method and try to pare it down.
Yet, there isn’t exactly a clear-cut way to build up your credit score. Nor is there a fast track. However, there is a general formula that can help you get there in due time.
Next, let’s review a few of the steps you can take to slowly but surely raise your credit score.
Pay Your Bills on Time
It sounds exceedingly simple, but paying your bills on time isn’t always an easy task. One study showed that nearly 6 in 10 Americans are anxious about their bills and almost half are late on their monthly payments.
If this is you, make every effort possible to get a payment schedule up and running. Late payments are an easy way to make sure your credit scores dip, so be sure to make them on time, every time. If collection agencies have to get involved, it can make your score falter even more.
Lower Your Debt
Not only is reducing your debt smart in general, but it can also give your credit score a boost.
Part of your score is based on your credit utilization ratio, which measures how much of your available credit you’ve used. If it climbs too high, it can effectively lower your score. Yet, if you can manage to use less available credit, you should see an uptick in your score.
Keep Your Credit Use Consistent
At this point, it might be tempting to open a new credit account to help manage your spending. Or, you might want to abruptly close an account. Still, resist the urge to make any major changes to your credit use right now.
Instead, keep your current accounts open (but inactive) and don’t add any more to your plate. Making sudden moves like that can make you look financially unstable and cause your credit score to decline.
As you take all of these steps, remember to give yourself time.
Your score won’t jump overnight, and it can take an especially long time to improve if you have major strikes against your credit report, such as a bankruptcy or foreclosure. These red marks can linger for years, even if you’ve taken all of the appropriate steps to rebuild your credit in the meantime.
Once you begin to notice your credit score start to steadily improve, you can try once more to apply for a debt consolidation loan.
5. Pursue Other Options
Even if you heed this advice and take the time to get your credit score back up, you might still face a loan denial.
If this happens, it can feel like a strike to the heart. Thankfully, there are other avenues to explore.
For instance, if a standard debt consolidation loan is a no-go, you can always apply for a bad credit debt consolidation loan that caters to people unable to achieve the money they need due to a low credit score.
Denied Consolidation Loans for Bad Credit? We Can Help
They seem innocent enough, those three numbers on the screen. Yet, the truth is that a low credit score can impact your life in ways you can’t even see.
Not only does it make it more difficult for you to apply for a consolidation loan, but it can also affect your likelihood of receiving a mortgage, car loan, and more.
If you’ve been denied consolidation loans for bad credit, we’ve got you covered.
When you tell us about your situation, we’ll get to work pairing you with the debt consolidation solutions that are the best fit for your needs. Our platform doesn’t affect your credit score in any way and can help connect you with the resources required to get a handle on your debt, once and for all.
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