Debt is common in the world today. Actually, to many people, it is a necessary ‘evil’. Accruing debts through credit cards or car loan repayments is widespread among many people. Debt consolidation loans are effective at helping debtors pay several unsecured debts. Debt consolidation entails securing a new loan to service many other debts.
Benefits of Debt Consolidation
Debt consolidation has two main benefits:
- It lowers loan interest rates
- It combines all loan payments into a single manageable monthly payment
This financial tool is of great help if utilized prudently. Sadly, acquiring this loan has its fair share of challenges. Are you wondering why your debt consolidation loan application did not go through? Well, the following are four reasons why most applications are declined and how to avoid them:
1. Lack of Security
When applying for a debt consolidation loan, financial institutions normally request for a collateral or security. This is especially true when applicants have difficulty in managing their existing payments. Financial institutions ask for security as a guarantee that they will get back the money they lend to you. Without collateral, your debt consolidation loan application cannot go through. To avoid being rejected, ensure you have a security before applying for this loan.
2. Credit Score and Credit Report Problems
Issues with your credit score and credit report can haunt you when applying for a debt consolidation loan. Late debt payments hurt your credit scores. This issue can be made worse by high balances owing. To avoid being rejected by financial institutions, ensure your credit report and score are impressive. Talk to financial experts to get advice on how to improve your credit score.
3. Too Much Debt
In most cases, credit unions and banks only allow individuals to borrow 40% of their gross annual income for purposes of consolidation loans. So what does this mean? It means that a bank will add your proposed loan to the existing debts (i.e., mortgage, credit cards, or existing loans) to verify whether they exceed 40% of the total income. If the proposed loan puts you above 40%, you will have to reconsider your consolidation loan application. The good thing is that you are allowed to apply for a smaller loan. Debt consolidation reviews feature comparisons of the most affordable loans to help you get good loan terms.
4. Insufficient Income
To secure a loan, your income must be able to take care of the monthly repayments. Financial institutions reject applicants with insufficient incomes because they need their money back within the stipulated period. Unless your home secures a consolidation loan, these loans cannot be repaid over a long time. These types of loans are normally amortized between 3-5 years. Consequently, your income should be able to service the loan within that period. If you can get a better job or take two jobs to boost your income.