Debt consolidation is one of the first solutions people think of when in debt. The reason is that it offers many advantages. It is not easy to get a debt consolidation loan. Banks will look at many criteria to screen out applicants.
Criteria that should be met to get a debt consolidation loan
Before granting a consolidation loan, financial institutions will want to make sure that their risk of losing money is as low as possible. To make a decision, they will take into account the following 5 criteria:
To be entitled to a debt consolidation, borrowers must have a good credit rating. If their long-standing debt problems and bills are repeatedly not paid on time, their credit rating will not be good. Very few financial institutions will be willing to make a loan in such circumstances.
The credit rating, also known as the “beacon score”, varies between 300 and 900. A beacon score lower than 700 reduces the chances of obtaining a debt consolidation loan.
To be entitled to a debt consolidation, debtors must show that their revenues are sufficient to repay the loan. In such instances, people with secure jobs and good incomes are more attractive. On the other hand, these criteria may disadvantage self-employed or seasonal workers who have unstable incomes.
Professionals such as doctors, engineers and lawyers are also privileged. Banks believe that they are less likely to lose their job. Also, lenders believe that their chances to reintegrate the workforce after a job loss are better. Consequently, their chances of obtaining a debt consolidation loan are higher than for construction workers, for example.
Furthermore, the odds of being granted a debt consolidation loan increase for people who have had the same employer for a long period. Banks consider people with a history of stable employment to represent a lower risk.
Residential stability has a reassuring effect on financial institutions. Their experience shows that people who move frequently have more difficulty to repay their debts. On the other hand, individuals who live at the same address for a long time have better debt repayment habits.
The debt ratio indicates the percentage of the gross monthly revenues that is used to reimburse debts. The ceiling set by banks varies from one institution to another. It is generally between 35% and 40%. Banks may exceptionally tolerate a higher ceiling up to 50%.
Banks compare the assets of an individual to his or her debts. They will show more trust towards an individual whose equity exceeds his or her debts.
An important asset consists of immovable property such as a house. Debtors who have the possibility of borrowing on their home equity to repay their debts have better odds. This is reassuring for financial institutions.
Alternatives to a debt consolidation
Financial institutions do not lend money out of the goodness of their heart. They will only grant a debt consolidation loan if they are almost certain of being reimbursed. If there are any doubts, they will reject the loan application. This is the reality many people are confronted with.
When their application for a debt consolidation loan is rejected, many people are devastated. They lose all hope of someday being able to settle their debt problems. Fortunately, there are alternatives:
A new debt consolidation application
After three unsuccessful attempts at getting a debt consolidation loan, it is better to explore alternatives. Stubbornly making other debt consolidation applications is a waste of time and energy. Furthermore, doing so can have a negative impact on one’s credit history.
Each application is recorded in a person’s credit history regardless of whether it is accepted or rejected. Lenders will be concerned if they see there are numerous applications over a short period of time. This might lead them to believe that the applicant is an individual facing debt problems. His or her chances of being granted a debt consolidation loan will decrease accordingly.
That being said, if an individual’s situation has evolved and the financial situation has improved since he or she was last denied a consolidation loan, it might be time to give it another try.
A consumer proposal
A consumer proposal is an alternative similar to a debt consolidation. It likewise allows to consolidate all unsecured debts1 and to make only one payment each month.
Furthermore, there are no interest charges and in some cases, only a fraction of the total amount owed has to be repaid.
A consumer proposal does have an impact on the credit rating. However, if a person’s attempts at getting a debt consolidation loan were unsuccessful, it’s likely that his or her credit rating is already in bad shape.
A consumer proposal is approved by the creditors after they’ve accepted the settlement offer.
Bankruptcy is a last resort option. Trustees in bankruptcy2 will only suggest such an alternative under specific conditions:
- the consumer proposal is not likely to be approved by the creditors
- the debtors would be unable to make the expected payments to a consumer proposal
- the debtors’ revenues are not sufficient to finance a consumer proposal.
In such cases, it is extremely rare to see people successfully settle their debts on their own. Generally, the situation only worsens. The fact is that sometimes, it’s better to face the music and go bankrupt.
Bankruptcy should not be seen as a failure. Instead, it should be considered an opportunity to make a brand new start.
A trustee in bankruptcy is a valuable ally
Any individual with debt problems would be well advised to consult a trustee in bankruptcy. First, only trustees are authorized by law to administer consumer proposals and bankruptcies. Also, most of them provide a free initial assessment and discretion is assured.
To get rid of your debts once and for all, do not hesitate to request a free consultation with a Ginsberg Gingras professional.
1 Unsecured debts are debts on which the lender has no security. Credit card and personal loan balances, income tax debts, as well as cell phone invoices are unsecured debts. On the other hand, mortgages and car loans are secured debts. Consequently they cannot be included in a consumer proposal or a debt consolidation.
2 The term “Trustee in Bankruptcy” will gradually be replaced by the new designation “Licensed Insolvency Trustee (LIT)”.