Debt Consolidation Loans

the_bigger_man

Hi folks!

Hopefully you can help.

I tried to take out a debt consolidation loan through Santander recently but was rejected due to having too much debt to income. Seems a little silly to me as I was applying to consolidate my debt?

Question is, when applying (screenshot attached), where it asks for monthly outgoings, I included my current outgoings to credit cards etc. Should I have included those that would be cleared by this loan or not? I fear that may be why they rejected me as I included my genuine current outgoings regardless of what will be cleared under the consolidation.

It just feels to me that it’s assessed by a computer that the debt you’re taking out is new debt on top of your current debt rather than new debt to clear the old debt leaving you with the same debt not more…

Otherwise I’m a little confused as to how you can hope to be accepted for a debt consolidation loan when the lender moans that you have too much debt…. I know, that’s why I’m consolidating it!

Thanks for any help and advice.

the_bigger_man

Picture as noted

[Deleted User]

Lenders always have to assume that you'll simply double your debt, as so many do. 

Head to the DFW boards for advice on cutting costs and repaying faster.

Chris_English

They have no way of knowing that you’ll actually pay off your existing debt, so tend to make a decision based on the total amount.

They also know that people borrowing to consolidate debt are often heading down the path to default or bankruptcy, which also reduces their willingness to lend.

Consolidation is rarely the best option.

the_bigger_man

I’m intrigued as to why debt consolidation is rarely the best option.
if you have 5-6 different outgoings paying interest on each, why not put them all into one loan paying less overall interest?
Would also cut monthly outgoings in half!

Ebe_Scrooge

the_bigger_man said:

I’m intrigued as to why debt consolidation is rarely the best option.

A couple of reasons.  Firstly, as you've already discovered, a lender has to take the view that your new lending will be in addition to, not instead of, your existing debt.  You are therefore likely to find it difficult to obtain a loan, or if you can it is likely to be offered at a higher rate of interest than their "representative" APR.

Secondly, there are numerous cases where people take a loan, use it to clear their credit cards, then simply run up further debt on the now-empty cards.  Within a few months, you're sat with twice the debt that you started with.  Unless you address the cause of the initial debt, a consolidation loan won't repay it, but simply move it to a different place.

A consolidation loan can work - we're not saying it's never a good idea.  But only if (a) you're able to get a loan at a decent rate, and (b) if you're super-super disciplined and live like a hermit whilst repaying the loan as fast as you possibly can, and absolutely do not run up further debt in addition to it.  The temptation to do that is, sadly, too great for many people.

Chris_English

the_bigger_man said:

I’m intrigued as to why debt consolidation is rarely the best option.
if you have 5-6 different outgoings paying interest on each, why not put them all into one loan paying less overall interest?
Would also cut monthly outgoings in half!

Because the temptation is to mentally write-off the new long-term loan and start to build up other forms of debt again. Sticking something on the credit card "just this one time", for example, but then doing it repeatedly.

You have already lived beyond your means, spending more money than you earn, and getting more and more into debt; why woudl putting all of your payments in one place stop you doing that again?

Have you identified why your spending has been out of control' made the changes to bring it back under your expenses, and got a few months of this new discipline under your belt, or is this plan to shift the debt to a new loan pretty much the start and end of the changes?

the_bigger_man

Thanks for your input folks.

[Deleted User]

the_bigger_man said:

I’m intrigued as to why debt consolidation is rarely the best option.
if you have 5-6 different outgoings paying interest on each, why not put them all into one loan paying less overall interest?
Would also cut monthly outgoings in half!

Or, of course, double them.

[Deleted User]

If you remember the old Ocean Finance adverts where people were struggling with debt, used Ocean to consolidate and were then shown sunning themselves on holiday with all the money they were "saving" - that is why!

As others have said, you want to consolidate, you get the loan but then your car breaks down/dog is sick/glasses fall off etc etc - your temptation is then to use the loan to cover that as you suddenly have money in the bank and it gets frittered away, so you have £30k of debt and £30k of new loan debt so having to cover £60k instead. Or you pay off your debt but now you have 30k of credit free to run up again. The days of going to a bank and getting the loan, the bank then pays off your debts and closes the accounts with you are long gone.

Hence affordability calculations for consolidation look at your ability to repay both as they don't want to get stung for irresponsible lending and forced to write it off. 

If you were earning £2,000 a month after outgoings and wanted to consolidate £20,000 of debt it's a lot different to someone who was earning £100 after paying off all their monthly debt bits - hence some people could apply for consolidation and succeed 

enthusiasticsaver

Debt consolidation is rarely a good idea for several reasons.  It is just kicking the can down the road.  First the lenders score you on keeping the existing debt as well as the new debt consolidation loan as there is no guarantee people will repay the old debt or even if they do they do not build the debt back up again on the empty cards. Secondly the fact that someone needs to consolidate debt indicates in some, not all circumstances that they are spending beyond their means and their finances mismanaged. Have you tried to repay the debt by budgeting and overpaying cards/loans?