So, you are considering applying for a debt consolidation loan. But before you go through this step, you may even wonder if you are likely to be approved.
A number of factors related to your financial situation are taken into account by a lender before granting you a loan.
Here are some things to consider when applying for a consolidation loan.
What is debt consolidation and why would I want to apply for a consolidation loan?
Debt consolidation involves taking out a larger debt in order to support your multiple smaller debts.
In doing so, your current balances are repaid and you become responsible for just one new loan.
Debt consolidation is an attractive debt relief solution because it facilitates the management of your debt (a periodic repayment, a creditor to deal with) and allows you to achieve ideal savings through a lower interest rate and lower account fees and fees than if you were having multiple debt accounts.
What will the lender evaluate to accept or refuse my loan application?
As we have already discussed, your credit score (or credit score) is a snapshot of your current credit status.
When a lender receives a credit application, it passes some of its details to one or more of the three Australian credit reporting bureaus, who respond with your credit score.
This shows the lender if you have an excellent probability of repaying the loan amount requested, a good probability, a medium or even low probability.
The lender will use this score as part of their decision-making process.
Debt consolidation loans are most often formed with a fixed term. This is the time needed to repay the total amount, usually three to five years.
Depending on the total amount of your current debt, your consolidation loan may be quite large and your repayments will need to be of a level to repay the amount within five years.
As a result, lenders must ensure that your income is high enough to meet your repayment responsibilities while maintaining a reasonable budget for your other living expenses.
Assets for security
Lenders often require applicants to have a guarantee or asset to be able to offer a consolidation loan.
This serves as collateral for the lender to potentially recover its losses if you are unable to cope with your repayments.
However, if you do not currently own a home, you can still get a consolidation loan.
Typically, the trade-off is in the form of a high interest rate (around 30%) or some other form of consolidation, such as a credit card balance transfer.
You may find that this will not help you to have a faster financial advance than your current situation. It is best to ask for free financial advice in this case.
Credit history and prior debts
Your credit history is part of what the aforementioned credit bureaus use to formulate your credit score.
If you do not have enough credit history, or if it is poor (whether due to past repayment defaults or bankruptcy), it can work against you when you apply for a loan consolidation. But remember, this is not the only contributing factor.
As you can see, a lender takes a lot into consideration when evaluating a debt consolidation loan application.
This may seem daunting, but you can access free financial advice and support to guide you through the loan application process.