What are Debt Consolidation Loans?
Debt consolidation programs or loans are a form of debt refinancing that combines multiple balances from credit cards and other high-interest loans into a single loan with a fixed rate and term. These products help fix your variable rate debts and provide a straightforward option to repay your debt under one loan.
It can help you save money by reducing your interest rate, or make it easier to pay off debt faster. A debt consolidation loan may also lower your monthly payment.
Depending on your credit profile, a debt consolidation loan could help improve your credit by diversifying your credit mix, showing that you can make on-time monthly payments, and reducing your overall debt.
Why is it Hard to Get a Debt Consolidation Loan?
Debt consolidation lenders deny debt consolidation loan applications to those who don’t have great credit, but also to those who have poor payment history or do not have enough credit.
There are many factors that play a role in how debt consolidation loan applications are processed and viewed so it’s important to discuss the terms with your loan provider to make sure you are looking for the right loan for your needs.
Reasons Why You are Declined for Debt Consolidation Loans
Debt consolidation loans are denied for a variety of reasons, but most of the time, lenders are unsure if you’ll be able to repay the loan. Not sure whether you’d qualify for a debt consolidation loan? Here are some things to consider before you apply for your next loan.
You Don’t Have Anything to Offer as Collateral
Financial institutions often ask for security or collateral when applying for a new debt consolidation loan, especially when someone can’t manage all of their payments. Lenders will do this to make sure they’ll get their money back in the event they extend the loan option to you.
Without collateral, many consumers resort to using a credit card to pay off other debts at 20% interest. Others apply for an unsecured loan from a finance company at a 30% interest rate or higher.
But if you’re trying to reduce debt, odds are these routes won’t get you ahead very quickly since a large portion of your debt payment will go straight to the interest with little going toward principal.
Credit Report and Credit Score Issues
There are many credit report and credit score issues that can prevent people from being approved for debt consolidation loans. Late debt payments or debts in collections hurt people’s credit scores.
High balances owed compound all of these problems and with so many variables, it’s best to read through a detailed explanation of how your credit score is calculated.
Not Enough Income to Qualify for Debt Loan
Usually, a debt loan payment costs more each month than paying just the minimum payments on credit cards. When someone realizes that they could benefit from a consolidation loan, they may only be able to make the minimum payments on their credit cards and not a penny more.
Credit card minimum payments are so low that it can take a number of decades to pay off a credit card balance, and that’s only if you stopped using the card while making the payments.
Consolidation loans cannot be paid off over a long period of time unless they are secured by your home. Consolidation loans are usually amortized over three to five years. This means that the payments have to be high enough to pay the loan off in three to five years.
If your income can’t handle that kind of payment, you could be denied your loan.
Not Enough Credit History
Many people who apply for debt consolidation loans have not been using credit in their own name for very long. It takes time for a strong credit report score to develop, so not having a long credit history may work against you.
Another aspect of this is having credit available that you don’t use. If you have a credit card tucked away for safekeeping, you should know that you need to use it responsibly to build a credit history, just having it doesn’t actually show that you know how to use it.
If you are joint on a loan, know that some financial institutions only report information about the primary borrower, not any secondary borrowers or co-signers.
Too Much Debt
There’s a maximum debt to income ratio that may be used when applying for any type of loan. This means that if you ask a bank for a loan, on paper they will add your proposed loan to your existing debt payments—these are your payments on your existing loans, credit cards, line of credit, or mortgage—to see if together they exceed 40% of your income.
They call this measurement your total debt service ratio (TDSR). If the new loan puts you over 40%, then you will have to consider applying for a smaller loan or no loan at all.
Talk to Our Debt Relief Experts for Solutions
Ready to take the next step toward a debt relief solution that works in your favor? Alleviate Financial has the right program for you. No matter your debt relief needs, or how long you’ve needed debt relief services, we can help set you on the right track.
These common reasons for personal loans work in some cases, but there are other options for debt relief that may not require additional debt. Alleviate Financial’s debt relief programs can help you with unmanageable debt. Contact us at 800-877-2309 at Alleviate Financial today!