You have multiple debts to repay and you’re considering applying for a consolidation loan to make your finances easier to manage. But who can actually get a consolidation loan?
Here are some of the factors lenders take into consideration when deciding whether to approve your application for a consolidation loan.
What is a consolidation loan?
Firstly, let’s recap what a consolidation loan is. Otherwise known as refinancing, a consolidation loan is a way of taking multiple debts and moving them into a single loan, subject to a single interest rate with a single monthly repayment. This allows you to deal with one lender and makes managing your debt significantly easier.
Generally, a debt consolidation loan is used for unsecured loans, credit cards and store cards. Some mortgage lenders allow you to consolidate your unsecured debts in with your mortgage.
Requirements for a consolidation loan
Lenders largely base your eligibility for a consolidation loan on your credit score and credit history. For this reason, it is worth checking your credit file before applying, which is free to do. If you have multiple payment defaults and/or numerous credit applications, lenders are unlikely to approve your application.
The amount you wish to borrow, that is, the amount of debt you wish to consolidate, is another leading factor. Lenders will look at your current income to determine whether you can service the minimum monthly repayments required to cover the loan. You will need to provide payslips to prove your income. You may be offered a longer loan term to lower the repayment amount if necessary. Several lenders require applicants to have a certain debt to income ratio, though this varies.
Beyond your income, lenders will take a look at your overall stability to determine if you are likely to remain in the same financial situation and therefore able to repay the loan. Factors such as length of current employment and duration of residing in your current home are considered.
Finally, lenders will look at the equity in your home. Understandably, they are reluctant to loan large amounts of money to applicants who do not have equity to provide security. Whilst it is possible to be approved for a consolidation loan without being a homeowner, it will likely be for a much smaller amount only, and you will likely pay a higher interest rate. Lenders will be more lenient towards homeowners on the above factors, as they know that they can foreclose your house and sell it to pay off your loan if you do not make repayments.
Knowing what lenders look for when determining whether to approve your application, will help you to decide whether a consolidation loan is the best debt solution for your situation. Remember, all lenders have their own specific criteria and each financial situation is unique, so you should speak to a trusted financial advisor before deciding whether to apply for a debt consolidation loan.