Debt consolidation is a popular method in Canada to manage heavy debt. This technique allows a debtor to combine all existing debt. By doing so, the debtor can negotiate to pay a single interest rate for all debts. Also, multiple loan payments can be combined into a single, more manageable monthly payment.
This method is a convenient way to reduce overall debt. All debtors are technically eligible for this combinative repayment method. Unfortunately, a few do get their refinancing applications turned down. If you applied for this kind of repayment scheme and were declined, don’t worry. All is not lost. There are other solutions available to you. Read ahead to find out what to do when your refinancing application is not accepted.
Find the Reason Your Debt Consolidation Request was Turned Down
First of all, you need to know exactly why you refinancing request was turned down. This reason is important to understanding your current situation and planning the next move.
There are several reasons why your repayment request may have been turned down. Most requests are commonly turned down because of too much debt. Yes, this strategy is a solution for owing too much. But there’s a limit to how big of a loan you can get approval for. This largely depends on your income. Financial institutions usually only allow this kind of loan for a monthly payment close to 40 percent of your current income. If you owe too much and the monthly payment for your consolidated loan surpasses this amount, it’s unlikely that your request would get approval.
If your income is too low or unstable, that could make you ineligible for this loan. When your debts are combined, you will have to pay a hefty monthly fee. As mentioned above, the fee should not exceed more than 40 percent of your current income. The lender expects you to pay off the consolidated loan in 3 to 5 years, which might not be possible with an income that is low. Banks also want to know if your income is steady. If you are a freelancer or a contractor without a steady flow of monthly income, you will be a less desirable candidate for one of these loans.
Credit score and credit history problems can weigh down on the final decision. It is possible to get turned down for a consolidation loan even if your credit score is good. The reason is too much debt, as mentioned above. On the other hand, if your credit score is low because you have missed multiple loan payments, this will work against you in an application. Banks are only willing to provide these loans to borrowers they can count on to meet the monthly payments. If your credit score or history indicates that you are an untrustworthy borrower, your loan will most likely be turned down.
Also, if you don’t have enough credit history in Canada, your request could be turned down. As explained above, banks want lenders they can count on. If you lack a strong credit history to show that you are a responsible borrower, a lender won’t bet on you being a good borrower.
Ask the bank or the financial institution the exact reason they turned down your request. You have a right to know the facts behind their decision.
If your request to refinance your debts failed, it’s not the end of the world. Consider these alternative solutions instead:
If your application fails to go through, you can still add the debt to your existing mortgage. Basically, this is a refinancing strategy that leverages the equity (value) of your home against existing debt. You will be offering your home up as collateral when you convert other debts to mortgage debt. Meaning, the risk of you losing your home is higher. Therefore, if you do add your debts to mortgage, it’s very important to keep up with payments and have a strategy to pay it down gradually over time.
Find a Co-Signer for Your Debt Consolidation Loan
You can also reapply with a co-signer. This solution is particularly effective if your application was initially turned down because of a low credit score or bad credit history. A co-signer can provide legitimacy for an application. You should ask a friend or a relative with good credit history and little debt of their own to be your co-signer. So, even if the bank finds you unreliable, the loan could still go through if the co-signer is viewed as more reliable.
Consult with a Credit Counsellor
If all else fails, it’s time to consult with a credit counsellor or a professional financial planner. A counsellor can provide you with a list of alternatives to a refinancing method. You can also draft a long-term plan for debt elimination with the help of a counsellor. A counsellor can properly advise you on where you may have gone wrong in your previous financial plan. You may even be able to raise your credit score and reapply. Seek a debt counsellor working with your local government or a non-profit institution. Don’t fall for dubious “debt counsellors” that charge hefty fees for “advice.”
As you can see, there are still options available even if your plan is turned down. So, don’t be discouraged. You will be able to eliminate that debt. Follow the advice above and think clearly regarding your finances.