In order to get a debt consolidation loan, you need to meet the requirements of the services you’re looking for. You can start by looking at debt consolidation in Canada to see if this is the type of support you need. If you don’t qualify for the loan, or decide that this isn’t the right choice for you, there are several other options to consider.
Opting for the wrong solution can sometimes lead to more problems with debt in the future. Therefore, it’s important that you understand your financial circumstances and find the service that will be the most successful in helping you become debt free.
How hard is it to get a debt consolidation loan?
Debt consolidation loans can be difficult to get if you don’t meet the requirements for the service. For example, bad credit scores will take quite some time to improve. It can also be a pretty big risk to offer up your home or your car as collateral. However, don’t let these limitations get to you. Many people in need of a loan have low credit scores. There are still ways to resolve your debt (see the list in the last section of this article). On the other hand, if you have a good credit score, then getting approved for a loan can be a much simpler and faster process.
How to get approved for a debt consolidation loan
If you’re hoping to get approval for a loan, you want to make sure you have all the information you need prior to applying. If you don’t have what lenders are looking for, there are solutions to help you get the loan. There are also other options besides a debt consolidation loan. Take a look below for details on how to qualify for a consolidation loan.
Improve your credit score
The chances of getting a loan with a low credit score are slim. You’ll more likely get approved for a loan with a credit score of at least 660 or higher in Canada. Your bad credit might be due to several reasons, such as missing payments, or short credit history, both of which take time to improve. You can start to build your credit score with a strong budgeting plan.
Earn a solid income
If your income is enough for you to pay your bills each month, that will put you in favour of qualifying for a debt consolidation loan. On the other hand, if you can’t cover the minimum payment for your credit card, you may have a more difficult time getting a loan. Most lenders don’t want to take a chance on loaning to you if you have a low income, in case you’re unable to manage the loan payment.
Reduce the amount of debt that you’re in
In some cases, if you’re in too much debt, it’s unlikely for you to get a consolidation loan. A good way of measuring your debt is by comparing the total amount you owe to your current income. Generally, if your debt is more than two fifths (40%) of what you make, that’s too much for a loan approval.
Get a loan for unsecured debt
You also want to make sure the lender accepts the debt you’re looking to consolidate. For instance, it’s hard to find a lender who accepts vehicle loans and mortgages (secured) as part of the debt consolidation loan. Lenders typically offer loans for high-interest debts that are unsecured. Nonetheless, there are still some lenders who accept secured debt.
Have good collateral
Secured debt consolidation loans through banks, finance companies, and credit unions generally require some form of collateral; a form of security. In most cases, your house or car can be used as collateral for a loan. This means you would be giving up either of those possessions to the lender, should you fail to make the payments within the timeframe you have agreed upon. Keep in mind that your house would have to be mortgage free or high in equity, in order to cover the amount of the loan. Same goes for your car; you’ll have a better chance at getting a loan with a newer model vehicle.
As you can imagine, losing your home or your car can be a pretty big risk. If you’re confident that you can pay off your debts this way, and that a secured loan will hold you accountable to do so, then this could be the solution for you. Otherwise, there are safer routes to resolving your debt. Don’t feel pressured to put your home at risk for it.
What to do when your loan request is declined
Explore the options below to see how to qualify for a consolidation loan when your request is rejected, and other ways to sort out your debt.
Consolidate debt into a mortgage or home equity loan
Adding a second mortgage is another option to help pay off your debts. It’s possible to receive up to four fifths (80%) of the appraised value of your house, not including the mortgage you still owe. A second mortgage allows you to consolidate multiple loans into one, just like a regular debt consolidation loan. The payment plan is also very organized; you’ll get to negotiate fixed payment dates.
A home equity loan is very similar to a mortgage loan. However, the amount you get for a home equity loan is the balance between the price of your home and what you still owe for your mortgage. There’s also no prepayment fee for a home equity loan. Your options for repayment are more flexible as well.
Before seeking a consolidation mortgage or a home equity loan, you should know that both require credit and income checks as well. Lenders want to see how financially stable you are, and whether your home equity is high enough for a loan.
Get a co-signer for the loan
You can ask a family member or a friend to be your co-signer for a loan, if you can’t get approval with your own credit score. Whoever your co-signer is should have a good credit score, and be financially stable. Before opting for this solution, it’s crucial that you understand the risks that come with it. If you fail to pay your loan, your co-signer will have to pay it for you; the lender will hold them accountable for it. In this case, you would be placing the weight of your debt issues onto your co-signer, and straining your relationship with them.
In short, you should be confident that you’ll be able to make your monthly loan payments. This means you only need a co-signer to get the loan approval, in which case, this option may suit you.
Credit card consolidation
You can also try to get a low-interest credit card and consolidate the debt of your other cards onto just one card. Unlike a debt consolidation loan, you won’t be receiving money to help cover your debt. Credit card consolidation simply makes it easier to keep track of what you owe. You can make a much larger payment than the minimum amount due per month, which will get you out of debt much faster. However, you’re expected to have a good credit score to qualify for a low-interest card. This may not be an option for you if you’ve already been declined a loan request.
Bad credit loan
If your bad credit is preventing you from qualifying for a consolidation loan, and you have no collateral to offer, you can try applying for a personal loan with bad credit. It’s important to note that a bad credit personal loan doesn’t consolidate your debt, which means getting out of debt may be a longer process. However, it can be done, as long as you follow a smartly planned budget. You can pay off your debts one by one and start to improve your credit over time.
Debt settlement program
It’s possible to lower the amount of what you currently owe, through a debt settlement program. The benefit to this is somewhat similar to a bad credit loan, except it’s not a loan. By reducing your debt amount, you have a head start at paying off what you owe. The sooner you’re able to make your monthly payments, the sooner you can start to improve your credit score. However, debt settlement is limited to unsecured debts (typically, credit cards). It can also take a while (1-2 years) to get approval from creditors. Moreover, a debt settlement program doesn’t apply to mortgage debts or vehicle loans.
Very similar to a debt settlement program, a consumer proposal allows you to negotiate lowering the amount you owe to your creditors. However, this is an entirely legal process; once the creditors approve of the proposal, it’s legally binding. Creditors also have less time to vote for or against the proposal, which cannot go through if any single creditor declines. This means, unlike a debt settlement program, you won’t have to wait so long to get a response.
Researching potential solutions for your financial problems, plus the pressure of making the right decision, can be quite overwhelming. Credit counselling can lead you in the best direction to resolving your debt related issues. Before seeking credit counselling, you should know about the drawbacks that come with the service. It will show up on your credit report, which isn’t good if you want to apply for more credit afterwards. You might also take longer to pay off your debt with credit counselling, since it doesn’t reduce the amount of debt you owe.
The bottom line is, if you’re able to form your own budgeting plan to get yourself out of debt, that’s probably the best option. However, if you’re at a loss of what to do, credit counselling can be very helpful for you.
Live on a budget
Many financial issues arise due to poor personal budgeting. It’s easy to fall into debt if you tend to make impulsive, and unnecessary purchases that your income cannot support. If the root cause of your debt is something you can solve by budgeting your money and setting fixed payment amounts for yourself per month, then that’s the best way to resolve your debts. Otherwise, if you get a loan and your spending habits continue, you may find yourself in a never ending cycle of debt. You should only seek financial loans if it’s not possible to deal with your debts on your own.
What credit score do you need to get a debt consolidation loan?
Generally, you want to have a credit score 0f at least 660 in Canada to have a better chance at getting a loan. The credit score range is typically between 300 and 900; the higher the better. Your credit score increases from good, to great, to outstanding between scores of 660 and 900.
Why can’t I get a debt consolidation loan?
The potential reasons are five fold: bad credit, low income, too much debt, type of loan, and no collateral. If any of these apply to you, then that could be the reason why you can’t get a consolidation loan. Scroll up in the article to read more about the 5 things you should consider before requesting a loan, and what you can do to help you get the loan.
What is the smartest way to consolidate debt?
It’s different depending on your financial situation. Generally, it’s smart to budget your money and start by paying off the lowest debts. Then you can consolidate those smaller payments with the larger bills, and work your way through them that way.
A debt consolidation loan can also be helpful if you don’t have a problem with budgeting. In order to use a loan successfully, make sure you stick to your monthly payments and keep your balance low.
Is it better to get a personal loan or debt consolidation?
Your financial situation, and your preference, will determine which option is better. If you’re looking to cover a particular purchase you’ve made, then a personal loan is the better option. However, if you have several debts to cover, then a debt consolidation loan is better. The latter allows you to combine multiple of your debts into a single monthly payment. This would make it much easier for you to keep track of what you owe.
What are the risks of debt consolidation?
If you have collateral, there’s a risk of losing your home or car. There’s also a risk of getting yourself into more debt if you’re unable to manage your money properly to pay off the loan. This can easily happen if you don’t resolve the underlying issue that’s causing your debt.
How long does debt consolidation stay on your credit report?
It depends on your situation, and the province you live in. Any negative information (missed payments or past bankruptcies) can stay on your report for up to 6 years or more. On the other hand, positive loan information can stay on your report indefinitely. Your credit score can be improved by positive information on your credit report.