What to Do If You Can't Get a Debt Consolidation Loan?

Getting a debt consolidation loan can be tricky. Like other types of debt management plan options, approval for the best debt consolidation loan is dependent on factors like your credit score and debt-to-income ratio. When you are already struggling to pay your creditors, you may not qualify for a debt consolidation loan that will really help you.

The problem with debt consolidation loans is that the approval process is often a catch-22 situation. You need ways to consolidate the loan to work your way out of debt, but your debt can hurt your credit score negatively, thus possibly preventing you from getting the loan you need. It’s frustrating, but thankfully there are other options if you need a credit card loan.

Reasons for Debt Consolidation Loan Rejection

When you can’t get a loan, your first step should be to find out the cause of the denial. Lenders will readily share such information. Also, the Equal Credit Opportunity Act (ECOA) — the law covering your rights as a loan applicant — compels them to make certain disclosures in this respect.

These disclosures come through a notice of adverse action. In it, your lender has to provide you with information on your credit reports and on ways you can challenge the information in these reports, should you find them to be inaccurate. 

The cause of your denial is likely one or a combination of the following reasons.

Poor credit score

Your credit score tells your creditors about your creditworthiness. A low credit score can damage your credit report, preventing creditors from lending to you. Improving your credit score will definitely increase your chances of getting approved for debt consolidation.

A low credit score indicates to lenders that you may have a history of financial mismanagement, late payments, or defaults. If you can’t boost your score to meet the lender’s minimum requirement, you are very likely to be denied a consolidation loan. This can negatively impact your credit, making it easier for future financial issues to show up. 

Over time, poor credit habits can continue affecting your credit, making it difficult to secure favorable lending terms.

High Debt-to-Income Ratio

Lenders assess your debt-to-income (DTI) ratio to determine whether you can make a budget and handle the new loan payments. The DTI ratio is the percentage of your monthly income that goes to paying down debt. 

If your DTI ratio is too high, it suggests that you may struggle to repay the loan, which means more risk to your lender. Lenders prefer a DTI ratio of 36% or lower. If your DTI ratio is too high, you may need to pay off some existing debts or increase your income before reapplying.

Insufficient income

Even if your debt-to-income ratio is within an acceptable range, lenders still need to see that you have enough income to cover the new loan payments.

If your income is too low or unstable, lenders may worry that you won’t be able to keep up with payments, especially if you can’t offer something of value as collateral.

Too much existing debt

If you have a large amount of debt, lenders may view you as a higher risk. Even with debt consolidation loan options, managing a large debt load can be challenging and lenders may worry that you’ll default. Some lenders set a maximum debt limit and will deny your application if you exceed it.

Recent or frequent credit inquiries

When you apply for credit, bank lenders perform a hard inquiry on your credit report. Too many recent inquiries can signal to lenders that you’re desperate to consolidate credit card debt or wish to take on too much new debt, both of which are red flags. If you’ve applied for multiple loans or credit cards recently, wait before applying for a debt consolidation loan to let your credit inquiries age off your report.

Lender-specific requirements

Each lender has its own set of requirements and criteria in order to consolidate your debt. Some consolidation loans may have stricter requirements than others, including minimum loan amounts, a specific type of loan, or even restrictions based on your state of residence. If your application doesn’t meet a lender’s specific criteria, you could be denied even if you have a decent credit score and income.

Bankruptcy or recent delinquencies

A history of bankruptcy or recent delinquencies on your credit report can be a significant hurdle in a debt consolidation loan application. Lenders view these as indicators of financial instability and a high risk of default. While these issues won’t necessarily disqualify you forever, they can make it much harder to get approved for a loan for a while. In some cases, even if you do get approved, lenders may offer lower loan amounts, a higher interest rate, or less favorable terms.

Unstable employment history

Lenders prefer borrowers with a stable employment history because it suggests consistent income and financial stability. If you’ve recently changed jobs, have a history of frequent job changes, or are self-employed without a steady income, lenders may hesitate to approve your loan.

Incomplete or inaccurate application

Incomplete applications, inaccuracies, or inconsistencies can raise red flags for lenders and have your application rejected. Double-check all your information and provide all required documentation. Above anything, review your credit history carefully and be honest about your financial situation.

Steps to Improve Your Chances of a Debt Consolidation Loan

Next, you need to address the cause(s) of why you are not getting a personal loan. If you need specialized help, seek professional credit advice and alternatives to debt from certified debt settlement companies such as ClearOne.

Fix any errors in your line of credit reports

If your credit report and credit history have errors, fix them. If you have made payments but these don’t show up on your credit, send the payment slips and have them fix it.

Earn more income

If your income is too low to qualify for a debt consolidation loan, you could try increasing it. Invest in your education and skillset to land better-paying jobs. If it’s time for a raise or promotion, negotiate one because it will instantly increase your monthly income. Otherwise, take on extra work or freelance to make more money and get the best chance of approval. 

Build your credit

Pay your bills on time to improve your credit score. Set up automatic payments and reminders to keep track of your upcoming bills.

Keep your credit utilization ratio below 30% of your total available credit. Pay down existing balance transfer cards and avoid new debt to improve your score over time.

Don’t open too many new accounts

Each time you apply for a new credit card, a hard inquiry is made on your credit report, which can slightly lower your score. Don’t open too many high-yield saving accounts in a short period, as this can signal to lenders that you’re taking on too much debt too quickly.

Use credit wisely

No matter how wonderful shopping is, be responsible with your expenses and credit cards. Don’t close old accounts even if you’re not using them; the longer your credit history, the better.

Pay off your debt

Whenever possible, pay back credit cards, cut unnecessary costs, and make credit card payments that are higher than the minimum payment.

Understand How Debt Consolidation Loans Work

Favorable debt consolidation options for bad credit are so rare that the concept itself is almost an oxymoron. 

To get a favorable debt consolidation loan, you need a good credit score. Lenders are not willing to hand more money to someone who is demonstrably irresponsible with debt. The unfortunate result is that they ignore those who need such loans the most. 

Debt consolidation loans for bad credit entail high interest rates and thus may not best suit your debt relief needs.  

The qualifying requirements for a good debt consolidation loan are: 

• A good credit score. 
• A good debt-to-income ratio. 
• A decent amount of home equity in the case of a secured loan. 

Through a secured debt consolidation loan, you are putting essential assets such as your home, car, or your best high-yield savings on the line. You risk losing these assets if you fail to keep up with the payments.

Debt Consolidation Loan Alternatives

Balance transfer credit cards

If you have good credit, you may qualify for a balance transfer credit card that offers a low or 0% introductory interest rate for a limited period — usually 12 to 18 months. This option lets you consolidate your credit card debts into one card and pay off debt without paying interest charges during the introductory period. To find the best balance transfer option, compare different offers available.

Transfer the balances from your existing credit cards to the new card. During the introductory period, focus on paying down as much of the balance as possible before the standard interest rate kicks in.

Debt settlement

Debt settlement plans negotiate with your creditors to settle your debt for less than what you owe. This option is ideal for people who are significantly behind on payments and face financial hardship.

You or a debt settlement company negotiate with credit card companies to reduce the total amount of debt you owe. Once an agreement is reached, you pay the settled amount in a lump sum or over a short period.

Bankruptcy

Bankruptcy should be considered a last resort, but it’s a legal process that can help you discharge or reorganize your debts if you’re unable to pay them off. There are two main types of consumer bankruptcy: Chapter 7 (liquidation) and Chapter 13 (reorganization).

In Chapter 7 bankruptcy, your non-exempt assets are sold to pay off your debts, and most remaining unsecured debts are discharged. In Chapter 13 bankruptcy, you create a repayment plan to pay down debt over three to five years.

A Debt Settlement Plan Can Help Accomplish the Same Goals as Debt Consolidation

Through a consolidation loan, debtors may get a lower interest rate, make a single payment per month, improve their debt-to-income ratio, make lower monthly payments, and pay off their debt within a reasonable time-frame. 

A debt settlement plan accomplishes the same goals, outperforming debt consolidation in some respects. To understand how the two debt relief options stack up against one another, let’s make a head-to-head comparison. 

To find the best solution for your needs, check your credit report regularly and compare annual percentage rates to secure the most favorable terms. Use the best savings accounts and explore money market accounts to manage your finances. 

Your optimal path to debt resolution may not be through debt consolidation. Through debt settlement, you can achieve the same goals without running the risk of losing your essential assets. If you would like to discuss all your debt relief options, contact a ClearOne Advantage Certified Debt Specialist at 866-481-1597.

How much can you save through this debt resolution method? Get a free savings estimate.