What are the Reasons For Debt Consolidation Being Declined?
Many households in Canada are worried about the rising cost of living.
Especially when their income doesn’t necessarily rise to meet it.
In order to bridge the gap between income and expense, many are forced to rely on lines of credit to keep the proverbial wolves from their doors.
But the more they’re forced to rely on credit, the more unwieldy their debts can become.
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With repayments coming out at different times during the month and at different rates of interest, it’s easy for these debts to spiral out of control and for a fortune to be wasted on interest.
In fact, A staggering 7.3% of the average Canadian household’s income goes toward interest charges alone.
A Debt Consolidation Loan, however, can replace all of their existing debts with a single loan with a (potentially) much lower rate of interest.
This can make their debts far more manageable, allowing them to better save and budget so that they’re far less likely to need to rely on credit.
The trouble, however, is that not every Canadian household qualifies for such a loan.
Here we’ll look at 5 of the most common reasons why applications for a Debt Consolidation Loan, and what debt-stricken Canadians can do if their application is unsuccessful…
1- Credit report issues
A Debt Consolidation Loan is just that… a loan.
And just as with any loan, the lender wants a degree of assurance that debtors are able to repay the loan.
As such, if there are any red flags that pop up in your credit report you may be declined.
If you have late payments or a high outstanding balance, these are both common issues which may give lenders pause.
Taking active steps to improve your credit rating can improve your chances of being accepted for a Debt Consolidation Loan.
2- Insufficient income
Many assume that if they’re able to cover the minimum monthly repayment on your credit card, that they’ll be able to make their repayments on a Debt Consolidation Loan.
However, these loans typically are repaid over a term of 3-5 years.
Even the longest terms rarely go past the 7-year mark.
Credit card debts, on the other hand, can last for decades, especially when making the minimum monthly repayments.
Indeed, many creditors are counting on their debtors making the minimum repayment.
They’re playing the long game, and they know that this will make them more money in interest (albeit over a longer time frame).
Consolidation Loan lenders will want to see that the applicant has sufficient income to make their monthly repayments consistently.
If they perceive that your income isn’t enough to make your monthly repayments (as well as other monthly commitments like your rent or mortgage) they may consider these significant grounds to decline your application.
3- No security
Let’s be honest, creditors don’t lend large sums of money out of the goodness of their hearts.
They do it to make money off of your debts.
They may make less money from applicants than their previous creditors but they need to be able to turn a profit.
As such, they’ll see anything that could result in a missed payment as a serious liability.
As such, many Debt Consolidation Loan companies will want some sort of security to mitigate their liability.
They need to ensure that the loan will be repaid no matter what.
If you are unable to secure your loan against a collateral asset like your home or vehicle, you may find that your application is declined.
4- Too much debt
A Debt Consolidation Loan can be tremendously helpful for all kinds of household debts.
There are some, however, which may be untenable.
By rule of thumb, banks and other creditors will usually only allow applicants to borrow up to 40% of their gross annual income for a Debt Consolidation Loan.
When they receive an application they add the monthly cost of the proposed loan to the applicant’s existing monthly commitments to see if they exceed 40% of the applicant’s income when combined.
This measurement is known in the Financial Services Industry as Total Debt Service Ratio or TDSR.
If the new loan would put applicants over this 40% line, they are likely to decline the application.
They may however agree to a smaller loan, although this may not account for all of your debts and see them benefit less.
5- Insufficient credit history in Canada
Finally, prospective creditors will look to your credit history to see how well you’ve historically managed your debts.
If you are have only moved to Canada recently, you may have insufficient credit history within the country for the creditors to rely on.
Even though you may have a very healthy credit history elsewhere, creditors can only access data on their home turf.
While you may still be paying down debts from overseas, your credit history may not necessarily follow you to Canada.
It takes time to build up a respectable credit history.
And remember that it’s not enough to simply have a credit card handy for lean times.
You need to use it regularly and pay off the balance in full monthly.
Do this for long enough and you’ll build up a respectable credit history.
Been declined for a debt consolidation loan? Let us guide you through your options
If you have been declined for a Debt Consolidation Loan it may strike you as a blow.
However, it’s important to remember that you still have options.
And only a Licensed Insolvency Trustee can help you to understand every available option.
They may suggest Credit Counselling, a Consumer Proposal or, in some cases, Personal Bankruptcy may be the best way to live debt-free.
They won’t push you to choose something that isn’t right.
They’ll just help you to make an informed choice.
Since 1999 we’ve been helping Canadians from all walks of life.
We can help you take control of your debts and live debt-free fast.
If you’ve been turned down for a Debt Consolidation Loan we may be able to help.
Call us today on (877)879-4770 to arrange a risk-free, zero-obligation and 100% confidential callback.
