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Will Applying for a Smaller Loan Help My Consolidation Application?

Michael Lux Blog, Consolidation, Student Loans 0 Comments

Student loan consolidation is growing in popularity, and the reason behind it is pretty obvious.  Borrowers are saving lots of money.  As students, most student loan borrowers had little to know income and a very limited credit history.  Now that they have finished school, many are taking advantage of their improved credit score and income in order to get lower interest rates.

Unfortunately, not everyone has the credit score and income to get their application approved.  If you have been denied in your consolidation application, you may be considering trying your chances by applying for a smaller loan.

Does a smaller loan help approval chances?

The answer here is probably not.  This is because lenders look at more than your credit score and income compared to the amount you want to borrow.

One of the most important numbers that any lender will look at is your debt to income ratio.  The key debt to income figure is your monthly debt payments compared to your monthly income.  If you make enough money each month to easily pay your bills, you probably have a good debt to income ratio.  If the budget is tight, getting approved is more difficult.

Lenders look at all of your debt, not just the debt you are considering taking out.  Suppose you have a total of $20,000 in student loans.  If you apply for a $20,000 loan and got denied, trying for a $10,000 loan may make sense at first glance.

The problem with the applying for the smaller loan is that lenders know about all of your debt from your credit report.  If they see that other $10,000 in student loans, they will want to see enough monthly income to know you can pay all off your student loans.  So whether you have $10,000 with one lender and $10,000 with another, or have all $20,000 with the same lender, the key is that you can comfortably make the payments.

In short, you may be applying for a smaller loan, but your total student debt is the same no matter what size loan you apply for.  Thus, your debt to income ratio can still be the reason you are out of luck.

How do I get approved?

If you have been rejected, the good news is that there are a number of things you can do to get your loans consolidated and to get a lower interest rate.  For starters, if you have just applied with one lender, it may be in your best interest to shop around a little bit.  With a number of companies offering student loan consolidation services, you may be able to get approved by take your business elsewhere.

If your credit score and debt to income ratio need a little work before you are able to consolidate, there are a number of different strategies that you can use to improve your chances sooner rather than later.  We have outlined many of them in our Guide to Turning a Rejection Into an Acceptance.