You know you want to get out of debt — you’ve made up your mind that it’s finally time to tackle what you owe. You’ve heard about debt consolidation and it sounds pretty great. Taking out a loan at a fixed interest rate and using it to pay off all your other high-interest debts can help you simplify the repayment process and hopefully get out of debt faster. So, you apply for a debt consolidation loan with high hopes… only to find out your application was rejected.
So, what can you do to address your debt if you’re denied a consolidation loan?
Possible Reasons for Getting Denied
First, take stock of why you were denied. Understanding your financial situation will help you choose an alternative solution better tailored to your circumstances.
Debt consolidation is typically an option for people whose debt, excluding a mortgage, totals less than 40 percent of their gross income. If your debt exceeds 40 percent of your annual income, some lenders may see you as a less-than-ideal candidate for consolidation and reject your application.
Another factor lenders consider is your credit score. This number, ranging from 300 to 850, provides a snapshot of your payment history and credit utilization. A lower credit score makes you riskier in the eyes of lenders, which means at a certain point they may elect to deny you a debt consolidation loan or offer you a loan with a higher interest rate to mitigate this risk.
Another reason some consumers are denied for consolidation loans is their income streams — lenders want to see proof of consistent cash flow because it assures them you have the means to make monthly payments on your loan every month. For this reason, it may be tricky to get a debt consolidation loan if your income stream is inconsistent or insufficient at the moment.
Exploring Other Debt Relief Solutions
It’s time to explore other strategies if consolidation is off the table because of your financial situation. As one NerdWallet expert writes for USA Today, “You’re better off seeking debt relief than treading water forever,” if you don’t meet the criteria for debt consolidation.
Debt settlement is a good method to research, especially if you’re struggling to keep up with minimum payments. The ethos behind settling debts is that creditors may be willing to negotiate, as they’d rather receive some payment than none at all. People have collectively resolved billions of dollars through settlement programs like Freedom Debt Relief. Of course, a settlement has advantages and disadvantages just like any other strategy — so investigate the risks, understand the process and read consumer reviews before committing.
Another option is working with a credit counseling agency to enroll in a debt management plan (DMP). You’ll make a single monthly payment to the agency with this approach, which then distributes payments to your creditors on your behalf. Your debt-holders may be willing to knock off some late fees or lower your interest rate when they see you’re enrolled in a DMP.
Bankruptcy is perhaps the most drastic way to get rid of debt but can provide a relatively “clean slate” for people currently in way over their heads — albeit at the price of damaged credit and potential liquidation of assets. The type of bankruptcy for which you’ll qualify will depend on your financial standing. Chapter 7 entails liquidation while Chapter 13 involves reorganization.
If you’re denied a debt consolidation loan, work to understand why. Then take what you’ve learned about your financial situation and find a more fitting strategy for your needs. You may be a candidate for debt settlement, debt management or bankruptcy.