When individuals begin to experience financial difficulties, one of the first things they do is consider contacting debt consolidation Toronto firms. This is an option for solving debt issues by lowering interest rates while also combining all debts into a single monthly payment that is more manageable for them. Although this is an excellent idea for many individuals, getting approved for this type of loan is not as simple as many people believe.
The following article outlines several reasons why a lot of people are declined when they apply for debt consolidation loans. Once you understand why you can be denied, you can discover what you can do to improve your chances of being approved.
Credit Score and Credit History Issues
This is generally the primary reason why you will be denied when applying for a loan to consolidate your debt. Once a lender receives your credit report, they will look for a history of delinquent payments, judgments and current debt collections against you. These are factors that can negatively affect your credit score.
If you have several outstanding high balances, they can complicate the problem even further. With so many deciding factors, you should take the time to research how credit reporting agencies calculate consumers’ credit scores.
Typically, payments for debt consolidation loans are more than the minimum payment you are probably making on your credit cards. Unfortunately, by the time an individual realizes that debt consolidation is an option for them, they may not be able to make more than a minimal payment.
Were you aware that the minimum payments most credit card companies require are so low, you would be paying the balance off in decades and not months? This is true if you stopped using the card altogether, and simply made the minimum payment.
A debt consolidation loan does not give you the option of paying the loan off over the course of several years, unless the loan is secured by collateral like a home. In this case, the loan would simply be a second mortgage. These loan payments are scheduled so the entire loan can be paid off within 5 years. This will mean that every payment would need to be set at an amount that would allow you to pay it off within this period of time.
If it is determined that your income is too low to cover the estimated monthly repayment amount, you will be declined.
A Lot of Debt
Most credit unions and banks will generally only allow applicants to borrow no more than 40% of their gross yearly income. So, what does this mean? This means that should you decide to apply for a loan with your bank, the bank will combine the proposed loan with your current debt payments. This will determine if your TDSR (Total Debt Service Ratio) exceeds 40% of the total income you make before taxes. If the loan will place you at a percentage higher than this percentage, you will have to consider trying to apply for a smaller loan or even forgoing the loan completely.
If you have been denied a debt consolidation loan, consider asking someone to co-sign. You can always speak to a counselor to help you gain some perspective on your financial situation, along with ways to remedy your situation.