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What to do if you’re denied a debt consolidation loan
Find out why you were declined and how to prevent it from happening again.
A debt consolidation loan is ideal if you want to organize your finances and pay off your debts faster or at a lower rate. If you've been disapproved, there are steps you can take to strengthen your application. Or if your debt load is too high, there are alternatives you can consider instead.
5 reasons you may have been denied
There are several reasons your debt consolidation loan application might have been rejected — even if you thought you had strong personal finances. Often you can find out why you've been rejected by contacting your lender. It's likely it denied your application for one of the following reasons:
It can be difficult to qualify for a debt consolidation loan if you have a large amount of outstanding debts, like federal student loans. Even if you don't plan on consolidating all of these debts, they could still hurt your application.
This might come as a surprise to borrowers on an extended or income-based repayment plan, which gives them a low debt-to-income ratio (DTI). But any large loan in your name gives you a high credit-utilization ratio, which lenders tend to view unfavorably.
Borrowers with a debt load within the lender's range might get rejected because they don't bring in enough money each month. Generally, if your debt is worth more than half of your annual income, you won't be able to qualify for a loan.
Lenders also look at your DTI, which weighs your monthly debt obligations to your monthly income. A DTI around 20% is typically considered good. Most lenders don't work with borrowers that have a DTI over 43%.
Low credit score
Most lenders have a minimum credit score requirement — even if they don't advertise it.
If your credit score has taken a dive recently, you'll have trouble getting approved for any type of loan. Even if you can, you likely won't get approved for one with more competitive rates and terms than what you already have.
Insufficient credit history
Lenders prefer borrowers who have an established history of paying off debts on time — some even have a minimum requirement of at least three years.
If you're new to borrowing and repaying debt, you might want to fatten up your credit file by applying for a credit card or credit builder loan before taking out a debt consolidation loan.
No collateral to back your loan — or not enough
Some debt consolidation lenders require you to back your loan with collateral. If your personal assets are insufficient to secure your loan, your application could get rejected — even if you meet all of the other criteria.
I know why I've been denied. What are my alternatives?
If you've been denied for a debt consolidation loan, you might need to change your approach before you apply again. Or you could consider other options that might be a better fit for your personal situation.
Find a cosigner
Adding a cosigner with a stronger credit history, higher income or lower debt load can help you meet a lender's requirements. It can also help you qualify for more competitive rates and terms — even if you can meet the requirements on your own.
However, not all lenders allow borrowers to apply with cosigners. You can find a lender that does and learn how it works with our guide to cosigner loans.
Apply for a bad-credit debt consolidation loan
When your credit score is what's preventing you from getting approved for a debt consolidation loan, you might want to consider applying with a lender that works with all credit types.
Bad-credit debt consolidation loans tend to come with less favorable rates and terms, but you'll have an easier time getting approved if a cosigner isn't an option.
Get a home equity loan
If you're a homeowner or currently paying off a mortgage, you can use your home as collateral for a loan to consolidate debt. You could consolidate student debt with a home equity loan as well as many other types of debt. With a home equity loan or line of credit, you can often borrow between 80% and 90% of the value you own in your home.
Like with other secured loans, providing collateral can increase your chances of approval and help you qualify for more competitive rates. But you stand to lose your home if you can't pay it back.
Explore debt relief options
Got a DTI over 43%? Have a debt load higher than half of your annual income? A debt consolidation loan might not do you much good when it comes to getting out of debt.
Instead, you might want to set up an appointment with a nonprofit credit counseling agency. It'll help you weigh your options and decide which is the best path to take.
In more extreme cases, you might want to consider debt management, where a credit counseling agency negotiates with your creditors for more favorable rates and terms. Or another option is debt settlement, where a company negotiates with your creditors to reduce your balances in exchange for a one-time repayment.
Been denied? Compare debt relief offers
If your debt-to-income ratio is higher than most lenders will accept and you've already weighed your other options, a debt relief company might be able to help as a last resort. Be sure to exhaust other options before using this high-cost service.
A debt consolidation loan can make it easier to manage your debts by having just one monthly payment. But you might have trouble getting approved if you don't have a high enough income, have poor credit or have debt worth more than half of your annual income.
In this case, explore your other options with our guide to debt consolidation.
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