Many people look for opportunities to consolidate their debt when they feel overwhelmed financially. But before you start thinking through your options, it is important to understand exactly what debt consolidation means, how you could consolidate your debt, and why a debt consolidation loan might not be accepted. There are many factors that influence debt consolidation. Our go-to guide on debt consolidate includes information about:
- What is debt consolidation?
- Ways to consolidate unsecured debt
- Consolidating your credit card debt
- Why your debt consolidation loan could get rejected
What is Debt Consolidation?
Debt consolidation provides a solution to those dealing with the stress and financial fatigue caused by overspending with credit cards. If you’re using credit cards while struggling to make even the minimum payments, debt consolidation can help turn your financial freighter in the right direction.
Debt consolidation organizes your debt in a manageable and affordable fashion. You should see reduced interest rates and a lower monthly payment, allowing you to regain control of your finances.
This approach works best for credit card debt. In limited situations, you could consolidate other unsecured debt like medical bills or personal loans and in very rare circumstances, student loans.
The first step in consolidation: Determine if the debt you are carrying is secured or unsecured.
- Unsecured debt is usually credit cards, but can also be personal loans or in very rare circumstances, student loans. It is unsecured because it has no collateral behind it. If you default, there is nothing for the lender to take back (like a house or car). However, lenders might try to get a court judgment against you and garnish your wages if you fail to pay back the debt.
- Secured debt means there is something of value, known as collateral, backing the loan. In most cases, the collateral is a home, but could be a car or property. Failure to make payments on secured debt can result in foreclosure (on a home or property) or repossession (on an automobile).
What’s your best next step? Gather all your bills, add up exactly how much you owe, and then research these options for consolidating debt.
Ways to Consolidate Unsecured Debt
There are several ways to approach and find debt relief, but generally speaking each option is tailored to a particular situation. Don’t blindly assume they will all work for you. Do your research and make an informed decision.
Here are eight ways to consolidate your debt:
- Debt management program
- Credit card balance transfer
- Personal loan
- Peer-to-peer online lender
- Home equity loan or line of credit
- Retirement account loan
- Borrowing from friends and family
- Cash-out auto refinance
Consolidating Your Credit Card Debt
Many credit card companies offer zero-percent or low-interest balance transfers to invite you to consolidate your debt on one credit card. What you should know about consolidating your credit card debt:
- The promotional interest rate for most balance transfers lasts for a limited time. After that, the interest rate on your new credit card may rise, increasing your payment amount.
- If you’re more than 60 days late on a payment, the credit card company can increase your interest rate on all balances, including the transferred balance.
- You probably have to pay a “balance transfer fee.” The fee is usually a certain percentage of the amount you transfer or a fixed amount, whichever is more.
- If you use the same credit card to make purchases, you won’t get a grace period for those purchases and you will have to pay interest until you pay the entire balance off in full (including the transferred balance).
Why Your Debt Consolidation Loan Could Get Rejected
Before you apply for a debt consolidation loan, you should know some of the common reasons why lenders sometimes reject these applications. Here are 6 reasons why your lender could reject your application:
- Low income: Lenders want to know if you make enough money to handle a loan. They are unlikely to offer you a loan if you’re struggling to make ends meet. If they believe you won’t be able to pay back your loan in a timely fashion, your chances of approval are low. They expect you to be able to manage your everyday expenses, your bills, and your loan payment. They typically require you to have some sort of regular, reliable income. Most lenders expect you to repay a consolidation loan in 3 to 5 years. If you are hoping for a consolidation loan, make sure you have a steady source of income before applying.
- Your credit score: Your credit score indicates how you’ve handled debt in the past. A low credit score makes you more of a financial risk in the lender’s eyes. If your score is low, your chances for a loan approval are low, but not impossible. There aren’t any quick fixes for a low credit score.
- Outstanding debt: In addition to your income and credit score, lenders will also look at your outstanding debts before approving a loan. If you have too many debts, including student loans, this can affect your eligibility. Most creditors will only allow you to borrow up to 40% of your annual income. This means your debt payments and consolidation loan cannot exceed 40% of your annual income. If this amount is greater than 40%, the lender may reject the loan or qualify you for a lesser amount. You can determine your debt-to-income ratio by totaling your monthly debt and dividing the total by your monthly income.
- Mistakes or missing information: In some cases, an innocent mistake on your loan application could result in a rejection. It’s easy to make a mistake by entering a wrong number, misspelling your name, or failing to provide the right documentation.
- No credit history: A poor credit history can keep you from getting a loan, but so can an insufficient credit history. If you haven’t established your own credit or you’ve used credit cards in someone else’s name, it can affect loan eligibility. Some lenders require you to have up to three years of credit history before they will consider approving this type of loan.
- No collateral for a debt consolidation loan: Some lenders ask for proof of collateral when you apply for a consolidation loan. This is a way for the lender to ensure some repayment if you default on the loan. They may require some form of collateral if you’ve had some credit problems or repayment issues with past loans. For lenders to approve your loan, they must feel certain they will not lose the cost of the loan.
Telco Credit Union is a full service, not-for-profit financial institution serving over 10,000 members. We serve eastern North Carolina, including Tarboro, Rocky Mount, and Greenville, NC. Profits are returned to our members, which are reflected in our ability to pay higher dividends on savings, offer lower interest rates on loans, and provide expanded products and services at less cost. Let us help you with your debt consolidation today!