Top 5 Reasons People are Declined for Debt Consolidation Loans

During difficult times, when people struggle to pay their credit card bills, loan payments, etc. applying for a debt consolidation loan seems to be the best option. Consolidating all debts under one umbrella seems more promising. Many a time, people struggling with debt don’t even look for other alternatives. Alternatives like home equity loan, DMP, Cash-Out Remittance, etc. might be more beneficial. 

Applying for the debt consolidation loan is one thing, and getting approval is another. There can be numerous reasons because of which your loan application can get declined. In this article, we have covered the top 5 reasons for the rejection of loan application. Besides this, the article would also help you in understanding how to deal with your consolidated loan application rejection. 

 

  • What is Debt Consolidation Loans

 

Debt Consolidation Loan is the loan that is taken to repay all the pending debts consolidated together. Taking a debt consolidation loan not only helps the debtor to clear the debts, but it also gives them other benefits like low-interest rate, paying one loan instalment instead of multiple payments, etc. 

Debt consolidation loan turns out to be a win-win situation for both debtors, as well as the creditors. Creditors get back their money, and debtors get an opportunity to get rid of their liabilities. However, not every loan applicant is lucky. Many debtors loan application gets rejected due to some or other reason — for example, a bad credit score, etc. 

 

  • Reasons why people declined it:

 

   – No Security for this Loan

Depending on the financial status and the credit history of the applicant, the lender might ask for some security. In case the debtor fails to make the payments or clear the dues, the financial institution can recover their money using collateral or the security deposited by the lender with the loan application. 

Hence, individuals who have a history of being irregular with their credit card or other debt payments have higher chances of loan rejection, in the case where they fail to keep something as security or collateral with the lender company. 

   – Low credit score

Another most common reason behind the rejection of a consolidated loan application is the applicant’s credit score. Our credit report and credit score play a pivotal role while submitting our loan application. People with poor credit scores have higher chances of loan application rejection as compared to those with an average or good credit score. 

Numerous factors like debts in collection, late or unpaid credit bills, etc. harm our credit score. Getting a loan with a poor credit report becomes quite difficult. Hence, clearing bills and making credit card payments on time is very important.

   – Negative payment history

Before approving any loan, financial institutions conduct a thorough “background check” to check the financial status of the applicant. In case your credit reports show the presence of negative payment history, things become more complicated as far as loan approval is concerned. 

Numerous factors result in bad payment history. Most of these factors are associated with missing payments on your behalf. The most common factors are:

  • Charge-offs
  • Late payments
  • Foreclosure
  • Debt collections
  • Tax liens
  • Bankruptcy

Another common mistake from outside those results in negative payment history is having a high balance on our credit card as compared to the authorized limit. It might take years to remove negative payment history. However, you can get negative payment from your credit score by negotiating with the collection company or the creditors for paying the outstanding debts and getting the negative payment deleted. 

   – Too Much Debt

In most cases, for a debt consolidation loan, banks and other financial lenders approve around 40% of the total gross income of the applicant. This means that if the applicants total of current debt payments plus the amount of the consolidated loan amount applied is more than forty percent of their yearly income, then either the bank can reject the loan or the applicant needs to reapply for a lower amount. 

   – Not Enough Income

The first and foremost thing that financial institutions and other lender checks before approving the debt consolidation loan is the income of the applicant. Having a steady and regular source of income is always a good sign. 

The repayment tenure of a Debt consolidated loan is around 3-5 years. This means that the applicant needs to have sufficient income so that he/she can make monthly loan payments, take care of basic and daily needs, and also have enough money to deal with unexpected expenses. If the lender finds that the applicant’s income is not sufficient, they can reject the loan application.

  1. Deal with rejection:

If your debt consolidated application got rejected because of any of the reasons mentioned above, don’t give up. Once rejected doesn’t mean that you cannot reapply. However, it’s advisable to do a little homework before applying again. Here are a few tips that might help you in getting your loan approved.

Consider the option of having a co-signer

In case you have a bad credit report or score, having a co-signer would be a much better option. Select a co-signer who has a good credit history. This would not only increase your chances of getting the loan approved but would give you other benefits like a lower interest rate. 

 Improve Your Credit Score by Speaking with a Credit Counsellor

In case your loan application gets rejected, and you are clueless about what to do next. Consider taking a professional’s advice. Contact a credit counsellor. A credit counsellor would guide you in finding the best possible solution for your problem. A counsellor would also help you in analyzing your situation and creating a budget accordingly. In case your loan got rejected because of a bad credit score, a credit counsellor would also help you in finding ways to improve your score.

Bottomline

Remember, getting a debt consolidating loan would help you in resolving your debt problem in hand. You need to analyze your lifestyle, expenses in respect of the income earned. This would help you in finding the route cause of unpaid debts. Once the problem is identified, you can find a solution to improve your financial fitness.

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