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Debt Consolidation Loans: What To Do If Your Application Is Refused


Although borrowing has almost always been common in Canada, the level of indebtedness of Canadian borrowers has certainly increased over the years. High interest rate credit card debt is one of the most common forms of debt, at one time or another, with which people struggle, even though debt comes in many forms. So, if you are a borrower and the weight of your debt becomes too heavy, do not worry, because there are solutions that can help ease some of the pressure. Certainly, some types of debt solutions may depend on the extent of your debt level.

For example, debt management programs, consumer proposals and bankruptcies obviously respond to scenarios that are much more difficult to manage. However, for borrowers whose household debt problems have not yet reached the point of becoming totally unmanageable, but at risk of becoming so, debt consolidation loans are a common treatment. Unfortunately, like any deleveraging solution, consolidation loans have both advantages and disadvantages.

One of the main disadvantages is that they are not always easy to get approved. In fact, potential borrowers must go through a thorough application and screening process before their lender can properly determine their creditworthiness. If a potential borrower does not have the necessary qualifications to qualify for a debt consolidation loan, his application will be denied. Then, not only will they be discouraged and without luck, but they will still have their debts on their shoulders. So what else can they do? Is there a way to have their next application approved? Well, if you find yourself in a similar situation or if you think you need a debt consolidation loan shortly, but do not know if your application will be approved, keep reading.

What is a debt consolidation loan?

debt consolidation loan

A debt consolidation loan works in a similar way to most other personal loans. You can buy one from your lender, which for the majority of borrowers is their bank, credit union or other financial institution. Once there, you will need to complete an application where items such as your credit, finances and employment history will be reviewed to determine the amount of credit for which you will be approved, if applicable. If approved, you will receive a loan for the specific amount in your case. You can then use the loan to settle most of your debts and repay it in installments, usually monthly. Then, in theory, of course, you will have simplified your life by taking on a single global debt, rather than multiple debts spread over many sources. In other words, you put all your eggs in one basket.


• If they manage well, borrowers will pay less interest over time as their other high-interest debt will be eliminated, provided they are approved for a low-rate consolidation loan.

• The financial life of a borrower should be a little easier to maintain because he will have a single loan, with a lower monthly payment.

• Since other debts of the borrower will be resolved more quickly, they could also avoid that their credit rating is too damaged. In turn, they can increase their credit rating by making their new loan repayments on time and in full.

The inconvenient

• All types of debt can not be paid using a debt consolidation loan. For example, credit cards, utilities and other consumer loans will qualify, but not the mortgage.

• Debt consolidation loans often require the borrower to have assets to offer as collateral, in case they do not repay their new loans. If the borrower defaults, the borrower could lose his assets, including his car, house or other property.

• If they are not managed properly, a debt consolidation loan can actually put a borrower even more heavily in debt than before. This means that if the borrower continues to use credit, in addition to his debt consolidation loan, his debt level will increase. Similarly, if they do not repay their new loan on time and in full, they will be penalized and their debt will get worse.

Why could you be refused

Lenders can refuse your debt consolidation loan application for various reasons. Yes, some lenders, such as major Canadian banking institutions, apply stricter rules than others for their credit processing procedures. However, all lenders, banks and others, will look at several key points in the borrower’s profile, such as their income, credit score and past and present debt problems. So, before applying anywhere, consider the following factors:

Inadequate income

One thing to remember is that lenders are companies like any other. They have to be sure of two things: their customers will be able to repay them and they will benefit. If your income is so low that the lender feels that you will not be able to track your loan payments, your application may be denied. At the very least, you may not receive the credit needed to pay off all your other debts.

Inadequate credit rating

Your credit rating is another important factor in determining your creditworthiness. A credit score works like a cumulative grade point average of 300 to 900. With each credit-related transaction you make, your credit score will increase or decrease. In a timely manner, full payments improve a score, while late, short, or missing payments damage it. According to TransUnion, a credit score of 650 or higher will place you in a range that is sufficient for the approval of any common loan or credit product. However, the lower your score is 650, the lower your chances. A low credit score is a warning sign for lenders as it may mean that you have a history of debt problems and are not paying on time. If your credit score is lower, but you get approval, you will probably have to pay a much higher interest rate, which in itself can cause more debt problems.

The current debt level is too high

The current debt level is too high


While the interest of a debt consolidation loan is to allow you to pay your other debts, if the lenders realize that your current debt is too difficult to manage, this may also result in the denial of your request. Once again, lenders want to know first and foremost that their clients have the ability to repay them. If you have a debt so large that a typical consolidation loan will not cover this debt or you have little chance of making your payments on time, you may be unlucky.

What to do if your request was denied

So, if your debt consolidation loan application has been turned down, or if you think this might be the case, you can do some things to improve your chances of being approved, for now or later.

Live below your means and maintain a healthy budget If the level of your debts is not yet too uncontrollable, the first solution, the simplest, is to make a reasonable budget and to respect it. Any other debt solution will likely have a lasting effect on your finances in one way or another, so if you can, try removing it before it gets too out of control. Do what you need to do, reduce your living space, buy name items at the grocery store, sell your car and take public transit, etc. Then spend some of your savings on managing your debts. If it means that your debt is not getting worse, it will be worth living below your means.

Start paying your highest debts



Fortunately, in setting a budget, you have saved a few dollars in the end. If this is the case, it will certainly work in your favor, especially if you have already been denied for a debt consolidation loan, in order to process your debts at higher interest as quickly as possible. The longer these debts remain unpaid, the more your debt level will worsen. As a result, not only will your future chances of debt consolidation loan approval be reduced, but any type of credit product you desire will become more and more inaccessible.

Ask a friend or family member to co-sign your loan

Ask a friend or family member to co-sign your loan


If your request is denied the first time or if you want to improve your chances before applying, find someone to co-sign. Even if you may not have the financial resources to obtain a lender’s approval, it may be helpful to hire a qualified person. So, try asking a trusted friend or family member who has good credit, a reasonable income and a low level of debt to co-sign your loan. However, before doing so, it is very important to know that if you find yourself late in your payments, the responsibility will fall on your co-signer. If the co-signer is also missing, he could suffer the consequences, such as a damaged credit, the seizure of his assets or even a garnishment of wages if the case is filed in court. Thus, not only will you be in debt, but your personal relationship may suffer.

Pay your debt using your real estate capital

Pay your debt using your real estate capital


Although this solution only works if you are already a homeowner, many borrowers will use the equity in their property to settle their debts. You can open a line of credit through your bank, use it to pay off all the debt you need, then pay it back in portions, limiting you to a minimum monthly payment, similar to a credit card.

If you do not have the equity to repay all your debts, you can at least take care of them and then renew your application for another consolidation loan. However, again, if they are not managed properly, you risk increasing your debt. In fact, tapping into the equity in your home is also known as getting a second mortgage. So, choose this path only if you are absolutely certain of being able to withstand the inevitable financial problems that result from it.

Consider a debt consolidation program

Consider a debt consolidation program


A debt consolidation program, sometimes called a debt management program, is a great option for those who can not get approval for a debt consolidation loan. When you enter the program, you will work with a qualified professional who will evaluate your finances, create a personalized program for you, and even negotiate with your creditors to lower your interest rates or eliminate penalties. The main goal of a debt consolidation program is to pay off your eligible debts in a monthly payment that is affordable and easy to manage with the help of a professional.

Ask a credit counselor for advice and then improve your credit gradually


As we mentioned, one of the main reasons your application was refused or may be refused in the future is that your credit is in bad shape. If this is the case, you can, for example, contact a credit advisor. Many of these advisors work for non-profit organizations, which means that asking them for advice will not cost you anything. They are trained to deal with all kinds of debt situations. Whatever your level of indebtedness, they should be able to give you the solution you need, without judgment. Then, once you’ve got good advice, you can improve your credit and manage your debt problems step by step. The more you manage to get your credit score, the better your chances of being approved when you apply. In turn, when your application is approved, a higher credit score will probably yield you a lower interest rate.

Beware of hard credit checks

Beware of hard credit checks

Whenever you apply for a new credit product, a debt consolidation loan or other, your lender will review your credit file, which will result in a “credit inquiry”. Informal requests occur when you check your own report and will not affect your credit score. Serious inquiries, on the other hand, occur after your lender has written your report when you are considering acquiring credit products, resulting in a slight decline in your credit rating. So, if you have already applied for a debt consolidation loan, your credit score will have been affected, as it will be every time you apply. It is for this reason that if you are refused the first time, it is important not to ask for more loans throughout the city, as every serious investigation will damage your credit score.

be proactive


One of the best things you can do about your debt is to be proactive and start managing it before it gets out of hand. We know this is easier said than done for many borrowers, but it helps us a lot to ensure a good financial future. If left unattended, your debts can stay with you for the rest of your life. Thus, while seeking the advice of a credit counselor is only ranked fifth on our list, this is one of the first things to do before and after the refusal of a debt consolidation loan.

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