Lenders aren’t willing to hand out loans to just anybody. The more desperate you are for one, the harder it may be to find a bank, credit union, online lender or even credit card company willing to offer reasonable interest rates and terms.
If you’ve been denied a debt consolidation loan, you know exactly what we’re talking about.
Don’t panic. As helpless as it may make you feel, a loan rejection is not the beginning of the end.
Learn Why Your Debt Consolidation Loan Was Not Approved
If your debt consolidation loan was rejected, it means lenders felt uncomfortable with your ability to repay what you borrow.
Let’s take a look at things from the lender’s point of view. What are their concerns and what can you do to address those concerns?
They want to assess how much of a risk you’ll be, i.e., what are the chances you will pay the money back? You may be a great neighbor or wonderful church softball teammate, but how’s your credit history? What’s your debt-to-income ratio look like? How’s your credit score look?
Lenders like numbers, a lot. Understand why those numbers are working against you and how you can make them work for you.
Here are some reasons you might have been denied a debt consolidation loan:
Income is the number that may matter most. Do you make enough money to handle a loan? Lenders are unlikely to offer you money if you’re only just scraping by. It’s a bit of a Catch-22: you need a loan to pay your bills, but you can’t get a loan unless you can pay your bills.
The way a creditor sees it, if your income isn’t enough to pay your existing loans, why should they give you another one?
Too Much Debt
The more debt you have, the more money you’ll need to borrow. It’s a lot easier to get approved for a $2,000 loan than a $20,000 loan.
Once again, your income will come into play in the form of a debt-to-income ratio (DTI). You want to keep your DTI below 36%, meaning only about a third of your monthly income is used to pay off debt.
For example, let’s say you make $3,000 a month, before taxes. If you spend $1,000 a month on debt, you’re looking at a DTI of 33% (1,000 ÷ 3,000 = .33). That’s great!
But say next month rolls around and you rack up a bunch of purchases on your credit card and owe $1,175. Your DTI (debt payments divided by gross income) jumps to 39.2% (1,175 ÷ 3,000 = .392), which is a few ticks above ideal.
A credit score is an indicator of risk. It tells the lender if you’ve been paying bills on time, how much credit you’re using and what the likelihood is that you will repay a loan. Creditors use this number to gauge your financial responsibility and if you’re struggling with debt, especially credit card debt, this could be a problem.
Debt consolidation loans for bad credit are hard to come by. Lenders like to see a credit score of at least 660 for a debt consolidation loan, but probably closer to 700 just to be safe.
It’s not the only factor that matters, but a low credit score could disqualify you for any debt consolidation loan with reasonable interest rates and terms.
Security is another word for collateral, which is something of value creditors can hang on to, should you fall short of repayment. The two most common types of securities are a home or car. Property, investments, even boats, are other forms.
Securities make you less of a risk in the eyes of a lender. They’ll know that should worse come to worst; they can walk away with something they can sell to recoup losses.
Make a Budget and Live Conservatively
When you need some financial help and get turned down for a debt consolidation loan, it’s a signal there needs to be a turnaround in your financial life. Spending and saving habits should change so you can make yourself more appealing to lenders and more effective in reaching your goal of eliminating debt.
Step 1 is simple: Make a budget.
Step 2 is more difficult: Stick to that budget!
Making a budget is as easy as downloading one of several budget apps like Mint, Clarity Money or PocketGuard. Those apps are free and extremely easy to use. You enter income and expenses as they occur and let the budget apps do the work of telling where you stand and how close you are to reaching your goals.
Access to up-to-date information available from the apps should make it easier to stay on track, but only if you are diligent about entering the data and committed to changing the way you manage your money. Don’t spend money on things you don’t absolutely need. Make paying down debt the priority for every paycheck.
Fix Your Credit and Reapply
Everyone wants a second chance and lending institutions might be the leaders in giving you one. They make money by lending, not denying. They want the numbers to work, but you have to help them out by fixing your credit problems.
Once you design a budget to guide your journey, the next step should be to take direct aim at the areas that lenders check before making a loan – income, credit score and amount of debt.
If you’ve been denied a consolidation loan, you can ask the lender which (or how many) of those elements were negative factors on your application.
If it’s income, it’s time to seek a promotion or find a part-time job to supplement your income. More money coming in means more money can go out to paying debt.
If it’s credit score, start paying debts on time every month. Pay at least the minimum amount due every month, without exception. That will have a nearly immediate positive impact on your score.
If it’s too much debt, review your budget and find areas to trim expenses. Take on a roommate to split costs of rent, utilities, maybe even food. Spend only necessities for at least 1-3 months. Eliminate extras like cable television, dining out, entertainment and clothing. Use those savings to pay down as much debt as you can.
Then reapply for a debt consolidation loan with confidence.
Show the lender how you addressed the negatives that resulted in you being denied a loan. Let them see how you’ve changed your financial life. Feel good about asking for a second chance because you’ve earned one.
Speak with a Credit Counselor
You may have been denied a debt consolidation loan for just one of the reasons listed above. Or, maybe a little bit of each applies to your situation. It’s hard to figure out exactly what made a lender pass you up. It’s like trying to point out the straw that broke the camel’s back. Not to mention, different lenders can have different reasons for choosing who to dish out their loans to.
This is why it’s often wise to speak with a credit counselor from a nonprofit credit counseling agency, who is trained to assess these sorts of things.
Credit counselors can take a look at your portfolio and point out the red flags poking holes in your credit report. They can even help you form a budget and provide some tips to improve your credit score. All of this will put you in position for better loan terms down the line. Best of all, nonprofit credit counselors are FREE! It doesn’t cost anything to hear their advice.
Work Down Debt
Lenders turn consumers down when they feel the consumer poses too great of a risk. Therefore, if you want to boost your chances of getting a loan, you need to work on improving the factors that made you such a risk in the eyes of lenders.
A second job is a sure way to boost your income, but your time is limited, and you might not want to add another 12-15 hours to your workweek. Still, an extra $200-$300 a week may be enough to sway a lender’s decision in your favor.
Consider turning one of your hobbies into a side gig. The internet has made freelance work very convenient these days. If you like to write, offer a guest blog to your favorite website. If you can edit videos, put an ad out for your services.
The best part about freelancing is it lets you work on your own time. Adding hours to your workweek is not ideal, but freelancing lets you cull an hour here, an hour there and make money.
Here are some ways to earn $$$ as a freelancer:
- A web developer or programmer
- Social media manager
- Graphic designer
- Video editor
Even with the nice boost to your income, you’ll still need to maintain a balanced budget if you want to build a strong enough portfolio to attract lenders.
Exactly how much you should be spending varies. For instance, singles won’t have the same budget as married couples with children. This is another aspect where a nonprofit credit counselor can help steer you in the right direction.
Alternatives to Debt Consolidation Loans
Your options depend on your credit score and the amount of debt you need to repay, but even those with the worst credit scores and seemingly drowning in high-interest debt can do something to make their next month financially feasible. Here are a few ideas:
Debt Management Plan
Debt management companies work with your creditors to cut interest rates and drop late fees. These plans are not quick fixes; they are 3-5 year commitments. However, by sticking to them, you can wipe yourself clean of all that crippling credit card debt.
The equity in your home can be a great resource when you’re strapped for cash and need to repay high-interest loans.
As of the first quarter of 2019, Americans have a record high of $15.7 trillion in home equity. If you have lived in your home for at least three years – and never missed a payment – you probably have some equity to fall back on. Home equity loans and home equity lines of credit are two tools you can use to consolidate debt.
However, with great resources comes great responsibility. When you tap into your home equity to repay debt, you’re putting your most valuable asset at risk. You can’t afford to come up short when your home is on the line. If you miss a payment, you could be subject to foreclosure.
Debt settlement lets you off the hook for less than the amount owed. The clear upside here is not having to repay a portion of your debt, but you’re right if you think it sounds too good to be true.
Debt settlement’s downsides come in the form of long (up to four years long) negotiations, lawyer or company fees, taxes on forgiven debt, and a major blemish on your credit report that will repel creditors for the next seven years.
Sometimes debt settlement does work out (it beats losing the house) but look for other ways to manage your debt.
It’s hard not to cringe at the thought of bankruptcy, but it can provide relief and a fresh start for overwhelmed consumers.
Bankruptcy makes sense if you’re so far off the rails you need a loan to keep the lights on.
Yes, it will tarnish your credit score for seven to 10 years, but chances are your score already has taken quite a beating and it can only plummet so far.
Nobody should rush into bankruptcy. This is why federal law requires you to complete a nonprofit credit counseling session, to make sure you’ve exhausted all other options before filing.
Balance Transfer Credit Cards
This may be a long shot, but if your finances took a downturn for an unexpected reason – Job loss? Major medical bills? Car died? – your credit score may still be good enough to get you a 0% balance transfer card.
You’ll need a credit score of at least 670 or higher to qualify. The balance transfer card allows you to take the debt from one or more credit cards and apply it to the new card at 0% interest. That means every payment you make reduces your balance without have to contend with interest.
There are some catches. The 0% interest is an introductory rate. It typically lasts 12-18 months and then regular rates (16% or higher) apply. Also, you normally have to pay a transfer fee of 3%-5% of the amount transferred.
But that 0% interest for the introductory period is a gift. It significantly reduces the amount you owe and should help you eliminate most, if not all of your debt before the introductory period ends.
About The Author
Bents Dulcio graduated from Florida State University in 2016 with a degree in Political Science, and knows a thing or two about Millennial student loan debt. While in school, he developed a passion for classic literature, reading books by authors from Homer to Adam Smith and developed a penchant for dealing with tight financial circumstances. Bents used the student loan money to pursue a semester of language study in France that helped convince him to become a writer. Bents still hits the books – he read 70 in the past year – and still knows how to cut corners financially.
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