Why have I been rejected for a debt consolidation loan?

If you can’t get a consolidation loan you should focus on reducing your debts as much as possible and building up your credit score. Alternatives to a debt consolidation loan include balance transfer credit cards or a debt management plan, for example.

7 min read
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Why have I been rejected for a debt consolidation loan?  

There are several reasons why a debt consolidation loan may be rejected. This type of loan isn’t right for everyone, and depending on your circumstances, an alternative debt management solution could be a better option for you.  

If your loan application has been rejected, try to find out why from the lender. This can give you the information you need to decide your next steps.  

Each lender takes different eligibility criteria into account, but there are typically four main reasons why someone will be considered ineligible for a debt consolidation loan: 

  • Insufficient income 

  • High debt-to-income ratio

  • Poor credit score 

  • No collateral 


Insufficient income
 

Affordability is one of the factors that lenders consider when deciding whether to approve your loan application. It’s part of being a responsible lender.  

If you don’t have a large amount of disposable income available (money left over once all your essential outgoings are paid), lenders might worry that you won’t be able to keep up with your new repayment and so reject your application.  

 

High debt-to-income ratio  

Debt-to-income (DTI) ratio is the percentage of your income each month that goes towards paying off debts. To estimate your DTI, simply subtract your monthly outgoings going towards your debts from your take home salary. 

A high DTI ratio can affect your loan eligibility as it limits the amount of income you have available to pay for a new loan.

The figure that triggers a high DTI varies from lender to lender, but generally a ratio of under 30% is considered good, while anything above 43% is high.  

 

Poor credit score  

A credit score is a number used by lenders to estimate what kind of borrower you are and how much risk is associated with lending to you. There are three main credit reference agencies in the UK – Equifax, Experian, and TransUnion – and each of these uses different data points and calculations to create your score. 

If you’ve missed payments in the past or have no credit history at all, you could have a poor credit score. While your credit score isn’t the only factor that lenders consider when determining loan eligibility, it’s still important. 

There is no precise credit score that can guarantee you’ll be approved for a debt consolidation loan. However, people with low credit scores can find it difficult to obtain a loan or access credit at competitive interest rates. 

 

No collateral  

Collateral is the term used to describe a financial asset, such as your home, that can be used to secure a loan. If you’re unable to repay your loan, the lender may repossess this asset to recover their costs.  

If you have a poor credit score or a high DTI ratio and don’t have any collateral to support your loan application, you might not be eligible for a secured loan and you may find it harder to qualify for a personal loan 

 

Secured vs unsecured debt consolidation loans 

A secured debt consolidation loan requires an asset, such as your home, to serve as collateral. This asset provides security to the lender and may be repossessed if you default on the loan.  

An unsecured debt consolidation loan does not require any collateral but represents a higher risk to the lender, so it may come with a higher rate of interest and strict eligibility requirements.  

 

Alternative solutions to debt consolidation  

If you can’t qualify for a debt consolidation loan, there are other options available that could help you manage your debts:  

  • Use any available cash savings to settle your smallest debts and improve your DTI ratio.

  • If you’re a homeowner, consider remortgaging with additional borrowing and using these funds to repay your debts.  

  • Enter a Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA).

  • Seek professional debt advice.  


What is debt consolidation? 
 

Debt consolidation is the process of merging multiple debts into one manageable monthly repayment.

Depending on your eligibility, you may be able to secure a debt consolidation loan with a lower interest rate or a longer loan term (with lower repayments) than your existing debts but you may end up paying more interest overall.  


How can I improve my chances of qualifying for a debt consolidation loan?
 

While there is no set credit score or list of individual circumstances that can guarantee you’ll qualify for a debt consolidation loan, there are steps you can take to improve your chances: 

  • Make a budget and cut unnecessary costs – implementing a workable budget that covers your essential expenses and allows room for some small luxuries could help you get on top of your finances and improve your affordability. 

  • Look for lenders or brokers that specialise in loans for bad credit – every lender has different eligibility requirements, and some can accept those with a limited or poor credit history. 

  • Make a joint application or apply for a debt consolidation loan with a guarantor who has a strong credit score.  


NEED TO KNOW:
Each time you apply for a loan, a hard credit search is left on your credit report. Too many hard credit searches in a short period can harm your score.  

Credit scores can be affected by many different things. However, there are actions you can take that could help to improve your credit score

  1. Check for mistakes on your credit report 
    Regularly checking your credit report can help you spot mistakes and credit applications that you don’t recognise. If you’ve found an issue with the address listed or a late payment that was paid on time, contact the relevant credit reference agency and it could be removed. 

  2. Reduce your total credit utilisation 
    If possible, use only a small percentage of the total credit available to you. This can show lenders that you’re a responsible borrower. It is also the reason why closing credit cards that you don’t use very often won’t necessarily improve your score, as it reduces the amount of unused credit available to you.

  3. Register on the electoral roll
    You can register on the electoral roll online for free. This is one of the most straightforward ways to improve your credit score and can be updated each time you move house to ensure your credit report is accurate. 

  4. Check your financial links 
    When you take out a finance agreement with someone else, your finances will be linked. This can include having a joint credit card or mortgage. As your co-signer’s credit score can affect your own, keep this in mind before agreeing to take on a new joint agreement. 

  5. Pay bills on time 
    If you have multiple debts and payment dates to remember, it can be difficult to pay your bills on time. However, missed payments can impact your credit score. Before applying for a debt consolidation loan, consider taking steps to help you stay on track, such as setting up direct debits to come out on payday.   

If you’re struggling with debt, you can access free financial advice and support from a professional debt specialist. Visit Money Wellness, StepChange, Citizens Advice, National Debtline, or Money Helper to find out more.