A debt consolidation loan is a great way to consolidate your debts into one monthly payment, usually at a reduced interest rate. However, if you apply for a loan and are turned down, that rejection can lower your credit score, making it even more difficult to qualify for a consolidation loan in the future. This makes sense, because if you are repeatedly turned down for a loan, other lenders will also not want to give you a debt consolidation loan.

So what should you do? Should you take your chances and apply for the loan, knowing that if you are rejected it will be even harder to qualify next time?

The answer is that you should estimate your chances of getting the loan first, and then only apply for a loan if it appears likely that you will qualify. Most banks determine your ability to pay based on your gross debt service ratio, which is the percentage of your gross income (before taxes) required to cover monthly debt payments (such as mortgage payments, car loan payments, and payments on other debts). If your gross debt service ratio is higher than 35%, it is less likely that the bank will give you a debt consolidation loan.

This calculation is relatively simple: take your gross monthly income and multiply it by 30% (which is less than the maximum permitted by the bank). If your income is $2,000 per month, your maximum borrowing capacity would be $600. If you are already paying $400 per month towards your debts, you can only afford a loan that has monthly payments of $200. If the loan will require payments of more than $200 per month, you will probably not qualify, so it may be in your best interests to wait until your income is higher, or your debts are lower, before you apply for a debt consolidation loan.

If you find the math confusing, there are many great debt consolidation loan calculators available on the internet, including my personal favorite for ease of use at http://www.debt-consolidation-loans-information.com/DebtConsolidate.html.

Debt consolidation is a good idea for many people, but only if you research your options, and do the math, to make sure its the correct option for you.

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