Touted by many finance experts as a smart move when facing a raft of debt, a consolidation loan can make the situation much more manageable. You’ll have one monthly payment instead of several. You’ll pay less interest overall and you’ll clear your debts up in a shorter amount of time.
There is, however, a catch.
You have to apply for the loan before your credit problems render your score too low to qualify, because you might get turned down. You’ll need a “Plan B” If that happens to you.
So here’s what to do if you’re denied a debt consolidation loan.
Find Out Why
It could be a clerical error, your income might be too low or your debt might be too high. Either way, you’ll need to discern the underlying cause of the denial before you can do anything about it. Figure out how to make more money if your income is too low. Look for ways to lessen your debt if it’s too high. Review your credit report to be certain all the information it contains is correct. Mistakes do have a way of creeping into credit reports. Dispute any errors you find, get them removed from your report and apply again.
Look for a Cosigner
Instances in which your credit history alone is a stumbling block can be overcome if you can get someone to loan you their good credit history. Family members or friends might be willing to help you out — if you’ve always demonstrated you’re someone who can be trusted to repay a loan.
Granted you’re in this situation because somewhere along the line things got out of hand, but if you can prove you understand what happened and demonstrate you’ve instituted measures to prevent a recurrence, you might have a shot at pursuing debt consolidation in this fashion.
Snowball or Avalanche it
There are a number of ways to attack debt in addition to a consolidation loan. The debt “snowball” and “avalanche” methods have proven effective in this regard. Both of them function similarly, though they attack the problem from opposite ends of the spectrum.
Let’s say you have three debts with balances of $3,000, $5,000 and $13,000. The interest rate on the $5,000 debt is 15 percent, the rate on the $3,000 debt is 20 percent and the rate on the $13,000 is nine percent. You’ve $1,500 with which to service these debts each month and you’ve been dividing it equally between the three.
With the snowball method, you’ll make the minimum payment on each debt instead, then apply all of the leftover money to the one with the lowest balance. You’ll repeat the process on the next lowest balance once that one is paid off. The full $1,500 will be available to pay on the one with the highest balance when its turn comes up. This strategy can help you build momentum as you go, like a snowball rolling down a hill.
You’ll use the same payment strategy with the avalanche method. However, you’ll attack the debt with the highest interest rate first and work your way down. This will help you minimize how much you pay in interest.
Consider Debt Management or Settlement
It will be useful to consult a credit counselor or a company that specializes in settling debts with creditors in situations in which your cash flow prevents the implementation of the strategy above. In both instances you’ll get an advocate who acts on your behalf. However, with debt management you’ll repay all of the outstanding debts, while a settlement professional will work to try to negotiate a significantly lower payoff on each debt. There are some drawbacks to these methods, so you’ll want to examine their pros and cons before deciding.
Bottom line, though, there are things you can do if you’re denied debt consolidation. The best course of action is to consider all the possibilities available and pursue the one most likely to be successful for you.