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When you first hear about debt consolidation loans, they likely sound like the answer to your prayers. A simple, streamlined way to make your debt payments manageable, pay less to your creditors, and achieve financial stability sounds great!
Not do fast; debt consolidation loans aren't for everyone. Not to mention, being declined for a debt consolidation loan can be a disheartening experience. You got your hopes up and applied, only to be rejected. What's your next step?
Here are five things to do if declined for a debt consolidation loan.
1. Figure out why you were declined
Debt consolidation lenders don't decline loans for no reason. To the contrary, they have plenty of incentive to give out as many loans as they can to qualified borrowers. It's how they make money. So, if a lender declined your loan application, it was for a good reason (at least to the lender). Understanding that reasoning won't just give you closure; it will help you understand your own situation so you know how to improve it before you seek another debt consolidation option.
There are three common reasons people can't get a debt consolidation loan: lack of income, too much debt, and faltering credit scores.
You were denied because of your low income
Your debt consolidation lender can't just take your word for it when you say you can afford to take on a loan. It needs to be sure you can make the payments. The main way it does that is by looking at your current income level in relation to your expected loan payments. If the lender doesn't think you can keep up with your loan, your chances are slim. You can ask for a smaller loan, but that likely doesn't help.
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 offering you a personal loan. If they think you're already struggling with too much debt, they're unlikely to give you more. If your lender isn't already aware that you plan to use your personal loan to pay off debt, you could mention it, which might make a difference. You could also seek out a lender that specializes in debt consolidation, as it might be more understanding when it comes to the size of your debt.
Your credit score is too low
Your credit score indicates your creditworthiness, in a sense. Are you safe to lend to? Can you be trusted to keep up with your payments? If your credit score is low, your chances of approval are low, but it's not impossible.
Unfortunately, there aren't many short-term solutions for a low credit score. You might be able to push your lender to offer you a loan, but it will likely be a high-interest loan, which will cost you more money in the end and can defeat the purpose of getting a debt consolidation loan in the first place.
Once you understand why you were denied your debt consolidation loan, it's time to take the next step: learn to live without it.
2. Make a budget and live with your debt as well as you can
If you can't get a debt consolidation loan now, then you need to figure out how to live without it, at least in the short term.
If you haven't already, make a budget to get a handle on your finances. Open up a spreadsheet and list every source of monthly income, making educated guesses where necessary (e.g. if you're an hourly employee). Then, deduct your fixed expenses (rent, car payment, etc.) and your variable expenses (utilities, groceries, gas, etc.).
Whatever's left is money you can be flexible with. You have a few options for how you'll use it. Responsibly, you can either save up as much of it as you can afford, giving yourself a buffer so that you no longer have to rely so much on credit (and drive yourself deeper into debt).
You can also allocate that money towards paying off your debts. By strategically paying more than your minimum monthly debt payments, you can get out of debt faster while paying less interest over time.
There are two basic approaches to this. The first is the "debt snowball." With the debt snowball, you first identify the debt with the lowest total balance. While continuing to make your minimum monthly payments, you pay your surplus income towards that debt, paying over and above what is necessary. This strategy enables you to eliminate one of your debts quickly, freeing up more of your income to pay off the next-lowest debt. In other words, it's a snowball effect.
The second approach is the "debt avalanche." Similar to the snowball, you choose a debt to focus on. With the avalanche, though, you identify the debt with the highest interest rate and focus on eliminating that. It might take you longer to eliminate that debt, but the avalanche should save you the most money over time, as it eliminates your highest sources of interest first.
Now that you've figured out the best way to live with your debt, you have a few options. Do you think you can get out of debt on your own? Do you still need outside help? If you need a hand getting out of debt, you still have options.
3. Talk to a credit counselor and figure out how to repair your credit
Let's assume that your low credit score and high amount of debt led you to be declined for your debt consolidation loan. If you're still curious about your debt consolidation options, you need to figure out how to get a handle on things. Sometimes, the best way to do that is to seek professional help.
Credit counselors are professionals whose entire job is to help people who are struggling with credit figure out what to do next. Many work for non-profits and offer free credit counseling services to those who qualify.
When you make an appointment for a free initial credit consultation, you'll sit down with a counselor who does his or her best to get a good picture of your finances. From your current income and debt levels to your total expenses and assets, your counselor will work with you to lay everything out in a way that you can easily understand.
Once your counselor understands your full financial picture, he or she will be able to walk you through your options. Your counselor may discuss the benefits of debt consolidation loans with you as well as other options, such as debt management plans. The professional will also walk you through what you need to do to improve your credit so you can qualify for better debt consolidation options.
In all, though, meeting with a credit counselor should arm you with all the information you need to figure out your next step in getting out of debt. If that's a debt consolidation loan, then your next step should be obvious: improve your credit and apply again.
4. Build up your credit and reapply
If denied for your first debt consolidation loan, sometimes, the best option is to try again. Re-apply and see what happens.
Before that, though, you should hedge your bets. As we've already discussed, there are three major reasons why people are denied for debt consolidation loans. They don't make enough money to keep up with the payments; they have too much debt to get the loan; or, their credit score was too low to qualify.
The answers for the first two problems are obvious. If your income is low, you'll need to find employment that is more lucrative, get a raise, or supplement your income in some other way. If your debt levels are too high, work on paying them down.
Increasing your credit score, on the other hand, can be a much thornier problem. There's no simple way to do it overnight, but there are certain rules you can follow to speed things up.
First, make sure you're paying all your bills on time. Late payments are one of the most common reasons why credit scores falter, and if you let them go long enough, your creditors will get collections agencies involved, which will cause your credit score to suffer even further.
Second, do what you can to reduce debt as much as possible. Reducing debt is a good idea in general, but it also plays into your credit score. Your credit utilization ratio measures how much of your available credit you've used. The higher it is, the more damaging it is to your credit score. The reverse is also true. The less you use, the better your credit score should be.
Third, try to avoid making any major changes to your use of credit. Opening and closing credit accounts can be damaging to your credit score, as can certain types of credit checks. If you have unused credit accounts, and you have the self-discipline to keep them open without running them up, do so.
Fourth, be patient. Credit scores can take a long time to rebuild. That goes double if there are negative items 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, even if they're the only things that currently count against you. Once they come off your report, you'll be in much better shape.
Once you see your credit score improve, you'll be in much better shape to re-apply for a debt consolidation loan. If you gain approval, that's great! If not, you have other options.
5. If all else fails, assess your other options
If, after all of this, you're still denied for a debt consolidation loan, it can be even more disheartening than the first denial. Don't worry, though; you still have other options, including balance transfer credit cards, debt settlement, and more.
With balance transfer credit cards, you open up a new credit card with a 0% introductory APR offer attached to it. For a set period, the balance on the card will not accrue interest, meaning that every dollar you pay goes towards reducing your total balance. You use that card to pay off your other debts, and then focus on paying down the balance before the card starts to accrue interest again. Essentially, it's the same idea as a debt consolidation loan.
Debt settlement is a very different beast but is likely more realistic for larger debts. With debt settlement, you work with a company that will act as an intermediary between you and your creditors. Instead of paying your creditors, you pay into a savings account managed by your debt settlement company for a set period. Of course, your creditors won't love this, but ideally, the debt settlement company will be able to deflect any collection harassment that you'd otherwise get for not paying your bills.
Once there's a sizeable amount of money in the savings account, the debt settlement company will approach your creditors on your behalf, offering a lump sum in exchange for forgiving the rest of your debt. Creditors will often say yes, accepting the easy money now instead of putting the energy into trying to make you pay off your debts in full.
If you're still not sure what your next best move is after being denied a debt consolidation loan, give us a call at National Debt Relief and let us walk you through your options. Our reviews speak for themselves; we've helped scores of people just like you to get out of debt.