Question: My bank turned me down for a debt consolidation loan. I don’t understand why. I am currently paying $1,000 per month on my three credit cards. My payment on the debt consolidation loan would only be $800 per month, so if I can afford what I am paying now, why would they not give me the loan?
Debt Consolidation Loan May Be The Expensive Option
Banks lend money based on a number of factors. The application process to borrow money for a debt consolidation loan through any lending company is similar to what you may experience with any other loan. To see if you qualify for a debt consolidation loan, your lender, whether a bank or other institution, will look at several factors:
- Your current budget and your ability to meet your payments based on that budget. It would appear that they have decided that, despite the fact that you are managing to pay $1,000 per month on your debts, they believe that you cannot afford even $800 per month.
- You must be working, or have a steady source of income. The bank will calculate your gross debt service ratio, which is their calculation of your ability to pay. It may be that you do not meet the minimum requirements at your bank.
- The bank may also require collateral depending upon your situation and the size of the loan you are requesting.
You could try another debt consolidation lender. However, depending on how much collateral you have, how much you want to borrow, and your ability to pay it back, the answer may be the same or worse you could be approved for a high risk debt consolidation loan where the interest rate can be as much as 20 percent per year. On top of paying thousands of dollars in interest, you may also be required to pay fees to the lender to process and arrange your loan.
Before you sign for a very expensive debt consolidation loan, you may want to consider another option such as a consumer proposal. This may be a better alternative for you.