Debt consolidation loans are a popular option for people struggling with multiple debts. They allow you to roll up all your existing debts into one new loan. The idea is that by having fewer repayments to make, you’ll be able to manage your money better.
But what if you’re refused? It’s not uncommon for applications to be turned down. And there are some things you can do if this happens to you.
If you’ve applied for a debt consolidation loan and been refused, here’s what you can do to get approved next time. (See also: 4 Simple Tips To Consolidate Credit Card Debt).
1. Start by paying off your biggest debts
It’s important that you prioritise paying off any high-interest debts first, as these will generally be charged at much higher rates than consolidation loans. You should also aim to pay more than the minimum amount due each month on these debts. Paying more means, they’ll get paid off faster and save you money in interest charges.
2. Pay your debt using your home equity
While this solution only works if you own a property, many borrowers will use the equity in their home to settle their debts. You can open a home equity line of credit through your bank to pay off your debt.
However, if you don’t manage it properly, you risk increasing your debt. In fact, tapping into the equity in your home is also known as taking out a second mortgage. So choose this path only if you are sure that you can handle the inevitable financial problems that come with it.
3. Consider a debt consolidation program
A debt consolidation program is a great option for those who cannot get approved for a debt consolidation loan. When you enter the program, you’ll work with a trained professional who:
- will assess your finances,
- create a personalized plan for you,
- and may even negotiate with your creditors to lower your interest rates or eliminate penalties.
The main goal of a debt consolidation program is to pay off your eligible debts into one monthly payment that is affordable and easy to manage with the help of a professional.
4. Beware of harsh credit checks
Each time you apply for a new credit product, your lender will review your credit file, resulting in a credit inquiry. Informal inquiries occur when you check your report and will not affect your credit score. However, each formal inquiry on your file will lower your score by five points. So if you’re already struggling with bad credit, multiple applications can make things worse.
If you have multiple hard inquiries on your report, it might be worth waiting a few months before applying for another product so that they don’t affect your score as much. You might also consider applying for one or two smaller loans instead of one large one. This will help spread out the impact on your score over time.
5. Try another lender
If you’re rejected by one company and know your credit history is in good shape, consider applying to another company. You may find that one lender is more lenient than another.
If your credit score is high enough and there’s no other reason they’d deny you, ask what they look at when reviewing applications. They may be looking at something specific in your history that isn’t indicative of your true financial situation and may not be worth worrying about.
In the end, debt consolidation loans can be a great way to get out of debt and set yourself up for financial independence. However, these products also present significant risks to the consumer.
We strongly encourage anyone considering a consolidation loan to conduct extensive research on rates and how those rates will work with their finances. If your new loan is not sustainable, then it won’t do you any good in the long run.