Are you paying too many debts and a lot too much interest? A debt consolidation loan often sounds like the perfect way out of this trap. A lower interest rate would be more manageable and a single payment would make it simpler to budget.
But although you know this consolidation loan would be affordable, a lender may not agree. You may find it difficult to get a loan that is large enough to solve your problem.
If you have had an application rejected, this is going to harm your credit record for the next few months. You have to work out why this has happened so you know what to do next.
Look at your credit record
If you already know your credit record is poor, that’s your problem. You just aren’t going to get a consolidation loan even if you know you can could afford it. This may feel unfair, you are being trapped paying lots of interest, but it’s just not going to happen. See below for what your real alternatives are.
But if you were surprised your loan was refused, the first thing to do is check your credit record. I suggest checking all three Credit Reference Agencies – you can now do this for free. Look at the details and see if anything looks wrong. MoneySavingExpert has good information on what to look for and how to get it corrected if there is a problem.
My credit score is good!
Lenders take the information from the Credit Reference Agencies and use it to assess whether to give you the loan. Most of them don’t use the “credit score” on its own to make a decision – they use their own criteria which they don’t publish. So whilst a bad score is a sign that you won’t get a loan, a good score doesn’t mean that you will…
Here are four reasons why a lender may have turned you down even though your credit score is good, or even great:
- lots of unused credit. This is a danger signal to a lender – you may be OK financially at the moment, but what if they give you the loan and then you max out the other credit cards?
- too many applications. This can look as though you are desperate and that’s not good.
- the loan is large for your income. The advert may have said “loans from £3,000 to £15,000“, but in practice the lender will make few unsecured loans over £10,000 and you would need a very high income to be offered one.
- too much debt for your income. This may feel like the worst reason. You are going to use the loan to repay those expensive credit cards, you aren’t going to be increasing your debt at all. But the problem is that the lender can’t be sure you would clear the cards and then close them.
Are there ways around these problems?
If you think too much unused credit might be the main issue, close any unused credit cards and ask for your credit limit to be cut on the others. It’s good to have some spare credit, but if you have a balance of £1,000 on a card, a £7,500 credit limit is too high – ask for it to be cut to £4,000 – that keep your “utilisation” under the 30% level which is good for your credit score. Then wait three or four months and reapply.
Only time will cure the too many applications problem. If you have been refused for several loans, you need to wait six months or more before applying again. Why not look at a financial detox to try to get your money into a better shape – paying off some more credit card debt is going to make the next application more likely to work. But be careful of assuming this is your only problem – it doesn’t explain why your first loan application was turned down.
If a lot of your current debt is with your own bank, try asking them for a consolidation loan – because they can pay it off your credit card and close it down, so they are in control of what you do with the money. But these loans tend not to be particularly cheap – the bank knows that you don’t have many other options.
Have a think about a smaller loan – you are much more likely to be given one. Sort out which debts is the most important to tackle. Sometimes this isn’t obvious – you may feel that the £270 you are paying for a loan is what is really causing the problems for you, but if it only has nine months to go, it’s better to grit your teeth and pay it off. Refinancing a fairly cheap loan that is ending soon means you are going to pay a lot more interest over the next 5-10 years. Instead your top priority needs to be the high interest debt, so look at your catalogues and credit cards.
You could also talk to your local Credit Union. They all have their own policies, but they may take a more individual approach, rather than “computer says no”.
One thing you should probably not consider is a secured loan. Converting unsecured debt to secured is almost never a good idea as, if you get into more financial trouble, it can mean losing your house. Also most secured loans are variable rate – it may sound affordable now, but interest rates may go up in 2019 or 2020… with unsecured loans you don’t have this problem.
Could the rejection be good news?
Not getting a consolidation loan may be the best thing that could happen for your finances! Too many people get a loan with good intentions, but don’t close down all their credit cards and soon are tempted into spending on them again. In a few years time, they are struggling with credit card debts plus the new large loans, a much worse situation.
This is so common that most debt advisors will say “don’t consolidate, instead look at other ways to reduce your interest”, because we have too often seen how consolidations loans go very badly wrong.
Alternatives to a consolidation loan
Many people who want a large consolidation loan aren’t going to get it, no matter who they apply to. Then there are two options, depending on how large your debt problem is.
If you can make the repayments on your existing debts, you were just hoping a consolidation loan would make things easier, you probably have to settle down to snowballing – this is the odd name given to the process of overpaying your highest interest debt. One of the benefits of snowballing is that it is great for your credit rating, so even if you can’t get a 0% balance transfer now, you may be able to in a while when some of your debt has gone.
If you are really struggling and don’t think you can manage like this for the years it will take, then a Debt Management Plan may be a good option for you – asking your creditors to stop adding interest so all your payments are paying down the debt. You do one yourself or go to StepChange, they don’t charge you any fees – don’t waste money by going to a commercial firm that advertises.