Are You Eligible for Debt Consolidation? Checklist

If you are thinking whether or not you will qualify for debt consolidation loans, you’re already trying to address the debt issue, which is a good sign. If you are considering the benefits of debt consolidation and whether you’ll qualify for it, you are also on the right path.

Understandably, there is a bit of uncertainty in taking debt consolidation loans. Though people with the worst credit score qualify for debt settlement programs, they fail to be eligible for debt consolidation. 

So, what are the factors that make you eligible for debt consolidation? Alpine Credits has a few points to share with you in this regard.

Factors to consider to determine eligibility for debt consolidation

There are three main factors that you need to keep in mind when determining your eligibility for debt consolidation. They are:

• Your secured loans cannot be consolidated with debt consolidation loans
• You can either have a good credit score or find lenders who offer high-interest loans even with low scores
• The debt service ratio should be around thirty-five percent or less

Let’s look at each of these three criteria in detail.

Debt consolidation is only for unsecured debts

So, are you eligible for debt consolidation? You need to understand that you are allowed to only consolidate debts on your unsecured loans. Generally, you can’t incorporate debts that are secured with collateral. Such debts include:

• Car loans
• Lines of credit for home equity
• Mortgages

You are allowed to consolidate all your unsecured debts, which are debts that do not need collateral. Such debts include:

• An unsecured personal loan
• Student loans
• Back taxes
• Credit card debts
• Personal line of credit

While consolidating to pay your debts, incorporate all your present accounts. It will make paying bills a lot simple for you, and you will pay off your debts quicker. Think of it in this way, rather than making multiple payments, you will need to pay only one bill every month. It will be especially helpful to people with multiple lines to credit that come with a different monthly payment date.

Good credit scores merit good interest rates

You need to have good credit scores to get the right interest rates for your debt consolidation loan. If the credit score does not look good due to collection accounts and missed payments, qualifying for loans will be hard for you.

In several cases, individuals have such a low score on their credit reports, that they simply cannot find lenders who will approve their loan. Now, even if they end up qualifying for the loan, the interest rate is higher than usual.

Also, the consolidation will not help you when the interest rate you qualify for is higher than the interest rate you pay on your present accounts. After all, reducing interest rates will not help you save much, and you will still keep paying almost the same amount every month. A debt consolidation loan will only be beneficial to you when the interest rates are not higher than your current payments.

It is also true that lenders have different criteria for borrowers to qualify for debt consolidation loans. While some lenders are okay to go with a high credit card balance and low credit scores, others have stricter criteria.

The fact remains that qualifying for all loans, even mortgages that are secured using homes as collateral, are hard to secure with a credit score that’s less than 600. Credit score requirements are higher for unsecured loans because the lender does not have collaterals to fall back on in case you don’t repay your loan.

Debt consolidation loans are not for you when your score is low. It is better to look for other ways in that case.

Understand the risks

However, if you are a resident of Houston, Texas, and suspect any errors in your credit report or have concerns about your eligibility, it is always recommended to consult a reputable attorney. An experienced credit repair attorney in Houston can guide you through the process and provide legal assistance in case of any discrepancies or issues with your credit score. In case your eligibility for debt consolidation is affected by any inaccurate information on your credit report, a credit repair attorney can help you rectify the issue and potentially improve your chances of qualifying for a loan.

Lenders consider your debt service ratio

When assessing your application for debt consolidation, lenders usually consider your debt service ratio. Debt service ratio refers to the percentage of the monthly gross income needed to make the minimum debt payment, which includes payments on secured debts and unsecured debts.

For instance, if you earn around $4,000 per month and pay a minimum of $1,500 per month to stay updated on your debts, the debt service ratio stands at 37.5%.

Lenders usually have different limits of debt service ratio for debt consolidation loans. They will factor in your new loans when calculating the debt service ratio. You might find it hard to get the approval from a lender when the ratio remains too high.

As per most experts, the ratio should remain at thirty-five percent. Based on the requirements of the lender, you might get the approval even with higher ratios. But you will need a high-income percentage to cover the monthly payment of debts. Ultimately, you will start living from one paycheck to another and never be able to make ends meet.

What happens when you don’t qualify for debt consolidation loans?

These loans are not for every individual. Many people who seek such loans have reached a point where even loans cannot help them. Their debt might be too high to qualify, and their credit score might be too low to get an approval.

It is time to consider other options when the majority of lenders say no to you. In that case, you can get in touch with a credit counselling company. They will assess your budget and debts to point out the right solutions for your requirements. 

In most cases, they ask people to go for debt management plans, which are basically repayment plans arranged by credit counselling organizations. It reduces the interest rate levied on the balance and lets you repay the debts with one monthly payment – a lot like consolidation.

The Bottom Line

You can be eligible for consolidating your unsecured debts if your credit ratio is good and debt service ratio is not high. However, if you cannot qualify for debt consolidation loans on your own, it is better to go for a debt management plan by a credit counselling agency. But remember: you need to be ready to make the necessary changes in expenditure for any of the ways to work.