If you’ve been denied a debt consolidation loan, you probably feel like your back is against the wall. Take a deep breath: It’s not as bad as you might think, because you have options.
When you first hear about debt consolidation loans, they might sound like the answer to your prayers. This type of loan appears to offer a simple, streamlined way to make your debt payments manageable, pay less to your creditors than you owe, and achieve financial wellness!
Not so fast: Debt consolidation loans aren’t for everyone. And even if this is the right option, you might be declined for loan, which can be disheartening.
If you got your hopes up and applied, only to be rejected, you are probably asking a question: “Now what?”
Five Things to Do If You Are Declined for a Debt Consolidation Loan.
If you have been declined for a debt consolidation loan, don’t give up. Instead, take the following steps:
1. Figure Out Why You Were Declined
Debt consolidation lenders don’t decline loans for no good reason. On the contrary, the more loans they hand out, the more money they make. So, they have plenty of incentive to approve as many loans as they can to qualified borrowers.
If a lender declined your loan application, there was a valid reason. Understanding why you were declined won’t just give you closure, but will also help you understand how debt specialists view your financial situation. That knowledge helps you improve your financial standing before you seek another debt consolidation option.
There are three common reasons people are refused a debt consolidation loan: lack of income, too much debt, and poor credit scores.
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You Were Denied Because of Your Low Income
Don’t expect a debt consolidation lender to take your word that you can afford a loan. The lender needs proof that you can meet the monthly payments.
To that end, the lender will look at your current income level in relation to your expected loan payments. If the lender doesn’t think you are up to the task, your chances of approval are slim. You can ask for a smaller loan, but that probably won’t do the trick.
You Have Too Much Debt
Aside from your current income level, lenders also look at how much debt you currently have on your plate before deciding whether to offer you a personal loan. If the lender thinks you’re already struggling, it is unlikely to offer you the loan.
It’s a good idea to make your lender aware of the purpose of your personal loan. This can make all the difference between hearing a “yes” or a “no.” You could also seek out a lender that specializes in debt consolidation, as this type of lender might be more understanding if you carry a large amount of debt.
Your Credit Score Is Too Low
Your credit score is an indication of your creditworthiness. Are you a good candidate to borrow money? Can you be trusted to keep up with the payments?
If your credit score is low, so are your chances of approval.
Unfortunately, there aren’t many short-term solutions if you have a low credit score. You might be able to convince the lender to offer you a loan, but it will likely be at a high interest rate. This approach will cost you more money in the long run and can defeat the purpose of getting a debt consolidation loan in the first place.
Once you understand why you were denied a debt consolidation loan, take the next step: Come up with a viable alternative.
2. Make a Budget and Live with Your Debt as Well as You Can
If you are not currently eligible for a debt consolidation loan, you need to figure out an alternative solution — at least in the short term.
If you don’t already have a budget, make one so you can get a handle on your finances. List every source of monthly income on a spreadsheet. Then, deduct your fixed expenses (rent, car payment, etc.) and your variable expenses (utilities, groceries, gas, etc.).
If the budgeting process reveals that you have some extra money left over at the end of the month, you have a couple of options for how to use this excess money.
One option is to give yourself a buffer by socking away as much as you can afford into a savings account. That way, you no longer will need to rely so heavily on credit to pay for unexpected expenses, which can drive you deeper into debt.
Or, you can allocate the funds toward paying off your debts. By strategically paying more than the minimum monthly payment, you will spend less on interest and pay the debt off sooner.
There are two basic approaches to paying down debt, and each has its own pros and cons.
The first approach is the “debt snowball.” Using this method, you identify the debt with the lowest total balance. While continuing to make your minimum monthly payments, you add as much extra money as possible to these payments. This strategy enables you to eliminate one of your debts quickly, freeing up more of your income to pay off the next-lowest debt. Hence, it creates a “snowball” effect.
The second approach is the “debt avalanche.” With this method, you identify the debt with the highest interest rate and focus on eliminating it. It might take you longer to fully pay off a bigger debt. But the avalanche should save you the most money over time since it helps you get rid of debts with the highest interest rates first.
Now that you are armed with important information, you might be able to get out of debt on your own. But it’s also possible you might feel like you still need outside assistance. If you need a hand, help is a phone call away.
3. Talk to a Credit Counselor to Help Repair Your Credit
Let’s say you were declined for a debt consolidation loan due to a low credit score and large amount of debt. If you are still curious about your debt consolidation options, you need a plan to get a handle on things. Sometimes, seeking professional help is your best bet.
Credit counselors are professionals who help people struggling with debt figure out their next move. Many work for nonprofits and offer free credit counseling services to those who qualify.
When you make an appointment for a free initial credit consultation, you will sit down with a counselor who asks questions to get a snapshot of your finances. From your current income and debt levels to your total expenses and assets, your counselor will work with you to lay out everything in a way you can easily understand.
Once the counselor understands the full financial picture, he or she can walk you through your options. The counselor may discuss the benefits of debt consolidation loans with you as well as other options, such as debt management plans. The counselor will also walk you through ways to improve your credit score.
Meeting with a credit counselor should arm you with all the information you need to figure out your best course of action. If the solution is a debt consolidation loan, your next step should be to improve your credit and apply again.
4. Build Up Your Credit and Apply Again
If you are denied a debt consolidation loan the first time you apply, sometimes the best option is to give it a second go. Apply again and see what happens.
Before that, you should hedge your bets. As already discussed, there are three major reasons why people are denied debt consolidation loans.
- They don’t make enough money to keep up with the payments
- They have too much debt to get the loan
- Their credit score was too low to qualify
The answers to the first two problems are clear. If your income is low, seek employment that is more lucrative, ask for a raise, or supplement your income in some other way. If your amount of debt is sky high, work on paying it down by sacrificing some nonessentials.
On the other hand, increasing your credit score can be more difficult. You can’t wave a magic wand and make bad debt disappear overnight, but there are certain rules you can follow to speed up things.
First, pay all your bills on time. Late payments are one of the most common reasons why credit scores fall. If you let bills go unpaid long enough, your creditors will get collections agencies involved, which can cause your score to fall further.
Second, do what you can to reduce your debt as much as possible. Lowering debt levels is almost always a good idea, and it can also play a large role in boosting your credit score.
Your credit utilization ratio measures how much of your available credit you have used. The higher the ratio, the more damaging it is to your credit score. The reverse is also true: The less credit you use, the better your credit score should be.
Third, try to avoid big changes to how you use your credit. Both opening and closing credit accounts can damage your credit score. It’s OK to close a credit account if you fear that leaving it open will tempt you to spend too much, however.
Opening new accounts — where the lender makes a “hard pull” when checking your credit record — also can hurt your score.
Fourth, be patient. You can’t rebuild your credit score overnight. That is especially true if there are major negative marks on your credit report, such as a bankruptcy or foreclosure. Those types of items stay on your credit report for years and can drag your score way down. Once they come off your report, you will be in much better shape.
As your credit score slowly climbs, you will be better situated to apply for a debt consolidation loan. If you gain approval the second time around, that’s great! If not, there are other options to fall back on.
5. If All Else Fails, Consider These Options
If you are still denied a debt consolidation loan, you will probably feel like throwing in the towel. But don’t give up, because there is still hope. Other options include balance-transfer credit cards, debt settlement, and more.
With balance-transfer credit cards, you open a new credit card that is offering a 0% introductory annual percentage rate (APR). For a set period, the balance on the card will not accrue interest, meaning that every dollar you pay goes toward reducing your total balance.
Use that card to pay off your other debts, but make sure time doesn’t run out before the introductory APR expires. It’s essentially the same idea as a debt consolidation loan.
Debt settlement is a very different animal, but it’s a great fit for larger debts. With this approach, you work with a company that negotiates with creditors on your behalf. Instead of paying your creditors, you make monthly deposits into an FDIC-insured savings account solely in your name.
If creditors begin blowing up your phone, the debt settlement company is there to help take care of those pesky phone calls for you.
Once the money in your savings account builds up, the debt settlement company will approach your creditors on your behalf and offer to pay a lump sum that’s usually a fraction of what you owe. In exchange, your creditors might agree to forgive the rest of your debt.
Creditors will often say yes to this offer, because accepting the easy money now is less of a hassle than pulling teeth to get the money later.
If you are still unsure what to do after being denied a debt consolidation loan, call National Debt Relief. An encouraging coach will walk you through your options.
