(Newswire.net — December 11, 2017) –Really quick, a consolidation loan works in this way; a person gets a large loan with the purpose of paying off other smaller loans. It is an awesome debt financing strategy that allows people to reduce the amount of loans they have and get enough time (and credit scores) to pay off their newly-acquired loan.
However, just as it is with every other type of loan, there are certain requirements that must be met before a person can qualify for a debt consolidation loan. The most demanding of these requirements that usually impede the approval process from going through are:
No/Inadequate Security for Debt Consolidation Loan
When applying for a debt consolidation loan, it is inevitable for the financial institution to ask for a security or some form of collateral. It is even made worse when a person has issues with managing their payments. The institution needs to ensure that no matter what, they are able to make the money that are lending out. It’s only logical.
So what if you don’t have substantial property or security that can be offered as collateral?
It is common practice for many people to just resort to using their credit cards to pay off their debts (at least, they do so at 20% interest). Others can simply apply for unsecured loans from various finance companies at 30% (this umber could also be a little higher). However, if you’re trying to reduce a debt, the truth is that routes like these might not get you ahead as quickly as you hoped, especially as a large portion of the income will go to the interest.
Debt Payment Troubles
Credit report and credit score issues can also prevent approval to consolidate debt through a loan. When people pay debts late, or if they owe huge amounts collectively, it hurts their credit, and the problem can get even compounded by high balances owing.
Not Enough Income
Usually, it costs much more on a monthly basis to pay debts on a loan that just paying the minimum required amount through a credit card. By the time it dawns on someone that a consolidation loan might actually benefit them, they may only be able to make the minimum payments on their credit cards.
Stats on msnbc news confirmed that minimum payments on credit cards are so minuscule that paying off a credit card balance can take a lot of years, and that’s only if the person refrained from making use of the card pending the time the full payment is made. It is not possible for a person to pay off a consolidation loan over a long time period except if the loan is covered by the person’s home (usually called a second mortgage). Consolidation loans are usually amortized over a period of 3 to 5 years, and that means that the payment has to be high enough to completely pay off the loan within those 3 to 5 years.
If your disposable income is unable to accommodate such a payment, your chances of getting a consolidation loan are very slim.