When you’re going through various financial problems that are bringing you a lot of stress, the only thing that permeates your mind is to get rid of your debt. So when you take the steps to do this by filing for debt consolidation only to end up getting rejected, it can be demoralizing and disheartening. But why has your application for debt consolidation been rejected? Let’s start with the basics:
What is a debt consolidation?
As the name implies, a debt consolidation involves bringing together all of the debts you have into one single debt. For example, if you have multiple credit card debts, a debt consolidation would add up all of your debts from each credit card into a single, bigger debt — a bank loan. Doing so is helpful in that it allows you to only pay one creditor instead of multiple, and the interest from a bank loan is usually much lower than the interest on other debts. You’d therefore be paying less in the long run. Unfortunately, banks do not grant consolidation loans to anyone that applies for them. But what are the reasons behind a rejection?
1) Poor Credit Score and Report
One of the reasons as to why a bank may reject your application for debt consolidation is that you have a poor credit score and report. This would mean that you have a bad payment history. If you have had trouble in the past with paying your bills (credit cards, internet, phone, etc), then that means your credit score has been suffering for it. If you have a bad credit score, banks might not trust that you will make your payments on your consolidation loan — you would be a risk for them.
2) No Credit History at All
Unfortunately, no credit history can affect your application for debt consolidation just as much as bad credit history. That’s because banks will see no credit history as a lack of experience with credit, and with lack of experience, banks cannot know whether you will be responsible enough to make your payments on your debt consolidation loan.
3) You Don’t Have Enough Income
In order to ensure that you are going to pay back the debt consolidation loan, banks need proof that you make enough money or have a stable enough job to do so. If you have a low income or unstable job, you’re not likely to be approved for a debt consolidation. It’s already difficult to manage monthly living expenses, adding a loan on top of that will make it difficult for banks to believe that you can pay it off.
4) Your Debt Ratio is Too High
When it comes to borrowing from banks, most banks will only loan out 35-40% of the applicant’s yearly income. To put things into perspective, if your debts exceed 35-40% of your yearly income, then you likely will not be granted a debt consolidation loan. However, if your debt to income ratio falls below 35%, then a debt consolidation could be the perfect solution for you.
5) No Collateral or Guarantee
Whenever you apply for a loan, most banks will ask for collateral or a guarantor. If you do not have any assets to pledge as security for repayment of a loan, or a guarantor who agrees to pay for you if you find yourself unable to make your payments, then it is likely that banks will reject your application for debt consolidation.
If you’re struggling with debt and your application for debt consolidation has been rejected, don’t hesitate to contact a licensed insolvency trustee for a free and confidential consultation. Your LIT will provide you with solutions to your debts so that you can release yourself from your financial burdens.