Debt consolidation is the process of rolling all your outstanding debts, and repayments, into a single loan. The ultimate goal is usually to pay off the debts at a lower interest rate and within a manageable time frame. Debt consolidation also helps people with bad credit to consolidate their debts, allowing them to get control of their finances. It is important to note this isn’t always the best solution for your situation, so make sure to consult a debt specialist before taking any course of action.
When it comes to consolidating your debt, you are declined and you have no idea why. Here are the top 5 reasons why your debt consolidation can be declined;
- No collateral for the loan
Financial institutions that offer debt consolidation loans often demand a collateral as a way to offset their risk, this collateral may be a house or car. Many people who don’t have any collateral to offer usually find themselves in a tight spot because they are forced to either apply for an unsecured loan which is offered at very high interest rates, or try to repay their debts using a credit card, this also attracts rates of 20% and above. Unfortunately, these options are not effective.
- Not enough credit history
You should have enough history showing how you have used and spent your money within Australia. Unfortunately, many people who apply for these loans have not been using credit in their own name for some time. If you don’t have a strong credit history then your chances of being rejected for a consolidation loan are increased.
- Issues with credit report and credit score
There are several credit score and credit report issues that can prevent your debt consolidation loan from being approved. In Australia, the leading credit reporting agency is Veda, with information of close to 20 million individuals across Australia and New Zealand. When you make an application to a lender, the lender will seek information about the applicant from Veda, and make a decision about the application based on the received information. The information provided includes past defaults, overdue debts, number of credit enquiries, names of current lenders who have provided credit, types of current credit etc.
- If you have too much debt
In Australia, most financial institutions will only allow you to borrow up to forty percent (40%) of your gross annual income. This is technically known as the TDSR (Total Debt Service Ratio). If the new loan exceeds this threshold, then they are duty bound to decline the loan or offer you a lower loan which is within the TDSR.
- You don’t have enough money
It is important to note that a debt loan payment does cost much more each month when compared against simply paying the minimum payments on credit cards, but it does get you out of debt faster. Debt consolidation loans are normally for a period of three to five years, and this raises the payments, although depending on the interest you are saving you may be paying less. If your current income cannot handle these repayments, then your application may be declined.