Debt is like the messy pests that find their way into your home and slowly rummage through your most valuable possessions. If unnoticed, these pests will destroy just about everything they can get on. Restoring these valuables to their initial state or an improved state will be an uphill task.
If you have found yourself deep in debt, you will have to look for the most affordable alternative just to stay afloat and to avoid having to file for bankruptcy. To get this life saving and restorative debt relief alternative, you will have to shop around. As you shop, one option will stand out because of its affordability and how it just feels right. This option is debt consolidation.
Debt consolidation is by far the most common or rather the most recommended debt relief option for individuals looking to take control of their finances. The loan taken is used to repay your outstanding debts and you are left with one predictable loan that offers lower interest rates and monthly repayments. Wouldn’t you rush into getting these options?
Unfortunately, even with the promising features of the loan, you may not qualify for this plan after all, bummer! So, before putting both feet and all your faith in the debt consolidation programs, find out if you qualify for the loan. Here are the requirements that the lender will look at for approval or disapproval of the debt consolidation loan:
- Earnings/ income
Anyone lending their money wants to find out if you are capable of repaying them. The first determinant that will be used to gauge your qualification is the proof of your source of income. Your payment stub will be used to determine how stable and steady your income is and your capacity to cover the debt consolidation loan payments.
To be on the safe side, companies use your debt to income ratio. A low debt to income ratio (DTI) illustrates a good balance between debt and your income. Every lender looks for a small DTI number.
To know your DTI, add up all your monthly debt obligations or the recurring debt, which includes the principal, interest insurance, and taxes for mortgage and every other loan. Calculate these totals against your income.
Lenders are more likely to approve loans for individuals with a disposable income of between 10-15%.
- Home equity
If you are asking for a large sum, the lender will ask for collateral, oftentimes, your home. So, home ownership increases your chances of getting the debt consolidation loan approved. A $60,000 home equity consolidates up to $50,000 in debt. Online debt consolidation reviews will guide you in finding the best plans where you’ll use your home as collateral.
- Overall stability
Approval goes beyond your income. Your residence for the past two years or so, and the number of years you have been with an employer will be used to ascertain your stability. Instability disqualifies you.
- Payment record/ credit score
Contrary to what you may have heard, a poor payment history, which reflects on your credit score may hinder you from getting the loan approved. At the same time, a poor credit score lowers the trust a lender has. To cushion themselves, lenders will only approve the loan at higher interest rates and this will result in an expensive loan, as well as classification as a high-risk borrower.
A credit threshold, the range between scores, is used to determine your creditworthiness and the scores are used to assess the potential risk of a borrower. A credit score above 620 is good to most lenders.
In conclusion, iron out these issues first before applying for the debt consolidation loan. Otherwise, find an alternative.