Debt Consolidation Loan Rejection Options

If you’ve been denied a debt consolidation loan, don’t beat yourself up about it. Debt consolidation loans can be difficult to obtain—they often require a good credit score, which is something many people seeking a debt consolidation loan don’t have. Worse yet, they may require collateral, such as equity in a home. And that’s not something you may want to put on the line!

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Reasons You May Be Declined for a Debt Consolidation Loan

There are five main reasons why finding debt relief through a consolidation loan may be elusive.

No Collateral

Lenders worry about getting their money back, so they may require you to provide some form of collateral, such as your home. While unsecured loans may seem like an easy alternative, interest rates can be high, especially for those with bad credit, making it a risky option if you’re already struggling financially.

Poor Credit Score

Having a low credit score, often caused by high debt balances or payment defaults, makes lenders more likely to turn you down. It’s helpful to understand what your score means before approaching a lender.

A credit score above 660 is considered ‘good,’ and helps you qualify for debt consolidation loans from top-rated lenders. A credit score below 660 is considered ‘fair’ and might preclude you from these high-rated banks and lenders. A score below 560 is considered poor.’ With a score under 560, you may find it difficult to find a loan with decent terms.

There are other factors affecting your credit score that are helpful to understand, including your payment and credit history and credit utilization.

Not Enough Income

Payments on debt consolidation loans are usually greater than credit card minimums. If a lender knows you’re already having trouble making minimum payments based on your income, they’re likely to turn you down out of concern that you won't be able to afford the monthly loan payment. Your source of income also matters, as employment income is key for loan approval. If you are on a benefit like Employment Insurance (EI) you will likely get denied, unless you add a co-signer.

Not Enough Credit History

Lenders prefer a long credit history, because it serves as an indicator for how you’ll manage the funds they’ll be providing you. For a look at your credit history, you can get a free copy of your credit report from Equifax or TransUnion once a year (don’t worry, it won’t affect your credit score).

Too Much Debt

Other than your unsecured debt, lenders may determine that you have too much other debt (mortgages, second mortgages, car payments, student loans, etc.). If these combined debt payments, along with the proposed debt consolidation loan payment, are greater than 40% of your income, most lenders may deny your request.

How to Improve Your Chances of Getting Approved

There are a few ways to improve your chances of getting approved for a debt consolidation loan.

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Improve your credit score. It takes time, but there are ways to rebuild your credit score. Get your accounts up to date, embrace good money habits and a strategy to pay off debts, and consider a secured credit card, which requires cash collateral and operates like a debit card. A free credit building counselling session with one of our certified Credit Counsellors is a great place to start.
Apply with a cosigner. If you have a cosigner with a healthy credit score and high income, this can reassure lenders. However, if you can’t make your payments, your cosigner will be responsible for your debt.
Compare lenders and try to pre-qualify. Prequalification is a way to explore the options provided by different lenders, only using a soft credit check, which won’t further impact your credit score.
Consider a secured loan. It can be easier to qualify for a secured loan, where you put up collateral, often your home. Borrowing against your home could result in housing instability if you’re unable to keep up with your payments.

Is a Debt Consolidation Loan a Good Option?

Even if you’re approved, obtaining a debt consolidation loan from the best debt consolidation loan companies still might not be a good solution for your circumstances.

When you get a debt consolidation loan, you’re usually allowed to keep your credit cards, which will now have zero balances. That can make it very tempting for you to use them and rack up debt again. Then, not only will you have that big debt consolidation loan to pay back month-to-month, but also additional credit card payments. This makes a difficult financial situation much worse, and defeats the purpose of a debt consolidation loan entirely.

If debt consolidation loans aren’t an option, or perhaps aren’t a good option for your situation, there are other options for you to explore.

Debt Consolidation Loan Alternatives

When you’re ineligible for a debt consolidation loan, there are three main options for you to explore.

Debt consolidation program. A debt consolidation program is an arrangement between your creditors and a non-profit credit counselling agency to simplify your debt repayments and, usually, negotiate lower interest rates.
Balance transfer credit card. Many financial institutions offer credit card balance transfers, which allow you to transfer your debt from other cards to a new one with a lower introductory rate. If you can pay off your debt within the introductory, promotional period, this might be an appropriate option for you. However, there’s typically a fee involved, and you may lose the promotional rate if you miss a payment, putting you back where you started.
Consumer proposal. A consumer proposal is administered by a Licensed Insolvency Trustee (LIT), allowing you to either pay off only part of your debt, extend the time you have to pay your debt back, or both.

Dealing with debt isn’t a one-size-fits-all scenario, but in most cases, debt consolidation provides the lowest risk while making long-term financial success more feasible. It’s helpful to speak with a professional to understand your options. By working with a reputable non-profit credit counselling agency, certified Credit Counsellors like those at Credit Canada can negotiate on your behalf to simplify your unsecured debts into a single, lower monthly payment.

Contact us to speak to a counsellor today or use our new AI Agent Mariposa to do a digital debt assessment. Get started here!

What Is a Debt Consolidation Program?

A Debt Consolidation Program (DCP) is an arrangement where you work one-on-one with a certified Credit Counsellor from a not-for-profit credit counselling agency who negotiates with your creditors on your behalf to reduce or stop the interest on your debt. They will also consolidate all of your unsecured debt into one easy-to-manage monthly payment that’s based on your current income and monthly expenses, so you can pay off your debt and still have enough money for groceries and all your other needs. This payment then gets distributed to all of your creditors that are on the Program.