So you’re considering applying for a debt consolidation loan. But before you take that step, you may be wondering whether you’re likely to even be approved for one.
A number of factors relating to your financial situation are taken into consideration by a lender before granting you a loan.
Here are some of the things that will be considered when you apply for a consolidation loan.
What is debt consolidation, and why would I want to apply for a consolidation loan?
Debt consolidation is the process of taking out a larger debt to accommodate your multiple smaller debts.
By doing this, your current balances are repaid and you become responsible for a single new loan.
Debt consolidation is an attractive debt relief solution because it makes managing your debt easier (one periodic repayment, one creditor to deal with) and ideally saves you money, with a lower interest rate and fewer account fees and charges to pay than if you were to have multiple debt accounts.
What will the lender assess in order to grant or decline my loan application?
As we’ve discussed previously, your credit score (or credit rating) is a snapshot of your current credit health.
When a lender receives a credit application, they forward some of your application details to one or more of Australia’s three Credit Reporting Bureaus, who reply with your credit score.
This shows the lender whether you present an excellent likelihood of repaying the requested loan amount, a good likelihood, an average or even poor likelihood.
The lender will use this score as part of their decision-1making process.
Level of income
Debt consolidation loans are most often formed with a set term. This is the length of time it will take you to repay the total amount, and is usually three to five years.
Depending on the total sum of your current debts, your consolidation loan may be quite substantial, and your repayments will need to be at a level that will repay the amount within five years.
Therefore, lenders need to see that you have a level of income high enough to be able to afford to meet your repayment responsibilities whilst also maintaining a reasonable budget for other expected living expenses.
Assets for security
Lenders often require applicants to have collateral, or an asset, in order for them to offer a consolidation loan.
This acts as security for the lender to potentially recoup their losses, should you not be able to meet your repayments.
However, if you don’t currently own a house, you may still be able to get a consolidation loan.
Usually, the trade-off comes in the form of a high interest rate (30 percent or so), or an alternative form of consolidation, such as a credit card balance transfer.
You may find that these won’t help you get financially ahead any faster than your current situation. It’s best to seek free financial advice in this case.
Credit history and previous debts
Your credit history is part of what the above-mentioned Credit Reporting Bureaus use to formulate your credit score.
If you don’t have enough of a credit history, or a poor credit history (be it due to previous defaults on loan repayments or bankruptcy), it may work against you when applying for a consolidation loan. But remember, it isn’t the only contributing factor.
As you can see, a lot is taken into consideration by a lender when assessing a debt consolidation loan application.
It may feel daunting, but you can access free financial advice, as well as support to see you through the loan application process.