11 Reasons Your Debt Consolidation Loan Was Denied

If your mailbox and email account are overflowing with “guaranteed” loan offers, it may seem like qualifying for a debt consolidation loan should be easy.

And it will be, as long as your credit score is good, your income is high and you’ve established a pattern of creditworthiness.

But if you apply for one of these loans believing it’s a sure thing and your application is denied, it might be a bit of a shock.

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Loan Application Rejected? Here are 11 Possible Reasons Why

It may seem frustrating and counterintuitive if a lender squashes your chance to roll your higher-interest debts into a loan with a lower interest rate.

Unfortunately, the borrowers most likely to meet the eligibility criteria for new credit need it least.

READ MORE: Debt consolidation

1. Your Credit Utilization is Too High

If you’re looking for debt consolidation because you’ve maxed out multiple credit cards, your credit utilization may be too high for you to qualify for new credit. Ideally, lenders want you to use just 30% of your available credit. If your credit utilization ratio numbers are closer to 80% to 100%, that could be a reason your loan was denied.

2. You Have a Low Credit Score

The primary reason most loan applications are denied is poor credit history. Most lenders have a minimum credit score required for loan approval. If your credit score is below 670, you might have trouble qualifying for a debt consolidation loan. Also, even if your credit score is above 670, your application may still be denied because your debt-to-income ratio (DTI) is too high.

Pro tip: Before you begin the loan application process, review copies of your credit report and check your credit scores. There are many options for free credit reports and scores.

READ MORE: How to get a free credit score

3. You Can’t Afford the Monthly Payment

Before approving your loan application, the lender will want to ensure that you have enough money to make your monthly payments. Debt consolidation loans have lower interest rates than personal loans, but also shorter repayment terms. This means that your loan will usually need to be repaid in full over three to five years. If you have a substantial amount of debt to consolidate, this could make the payments too high for your income, and the lender will determine that the risk of default is too high.

Pro tip: If this is the case, try applying for a personal loan with a longer repayment term. There are even lenders who specifically lend to borrowers with bad credit.

4. You Don’t Have Collateral

When applying for loans, there are two different types:

Unsecured loans don’t require collateral, and the risk is higher for the lender.
Secured loans are secured by an item of value, like your home or car.

Because secured loans involve less risk for the lender, the credit score requirements are less restrictive and it may be easier to get approved. But your loan application could be rejected if you don’t have an asset to offer. And if you’re unable to make your monthly payments, the risk for borrowers is exceptionally high. They could face home foreclosure or car repossession.

READ MORE: Secured vs. unsecured debt

5. Your Credit History is Insufficient

Lenders often require at least two years of credit history for a loan large enough to consolidate debts. Those with no credit history or poor credit will have trouble getting loan approval.

The good news: You can start building credit history early and you don’t need a credit card to do it. If you’re too young to qualify for a credit card, or your credit score is too low, you can build credit by signing up for a service like Experian Boost and get credit for making on-time monthly payments to subscription services and phone companies. You can also be named as an authorized user on a family member’s card. There are even credit-builder loans, where you make a small monthly deposit and the money is repaid to you after a year, and services like Kikoff credit, where they provide their own line of credit for members, and it helps boost your credit score.

Pro tip: If you’re seriously considering a debt consolidation loan, start working now to boost your credit score.

6. Your Income is Too Low

Lenders will consider how much your monthly loan payment will be and whether you can afford it. They will add up how much debt you have compared to your income and calculate your debt-to-income ratio. If the ratio for your recurring bills is higher than 36%, lenders may fear that you’ll be unable to afford your loan payments.

READ MORE: Easy ways to make $500 fast

7. You Have Too Much Debt

If you already have a high amount of existing debt, issuing you a new loan is a considerable risk, and your application may be denied. This can be particularly frustrating when the reason you want to borrow money is to create one monthly payment that you can afford.

8. Your Payment History is Poor

If your credit report shows a pattern of missed or late payments, a lender will fear the worst and assume you’re a higher risk. On-time payments are a key component of your credit score, and a single late payment stays on your credit report for seven years.

READ MORE: How to build credit

9. You Don’t Have Steady Income

If you’re a freelance worker or contract employee who doesn’t have a consistent monthly income, there’s no way to assure the lender that you can handle loan repayment.

10. You Owe a Substantial Amount of Student Loans

Though these generally won’t hurt you as much as credit card debt, too much student loan debt could be a red flag to a lender worried about whether you can afford your monthly debt payments, particularly if you’re just starting out at an entry-level job.

READ MORE: Student loan consolidation

11. Your Loan Application is Incomplete or Incorrect

If you don’t submit the required income documentation, don’t have a Social Security number or official government ID, or even make a typo when entering essential details, your application will be denied.

Figure Out How You Got Into Debt in the First Place

If you’re confused or unclear about how you accrued so much debt, a debt consolidation loan won’t be a good solution for you. First, you must address the underlying problems that caused the debt and understand where your money goes each month. Only then will debt consolidation be an effective way to become debt free.

More Debt Relief Options

Don’t panic if your loan application is denied. You still have other options to tackle your debt.

Debt Settlement

If you have over $10,000 in unsecured debt and your debt consolidation loan was denied, debt settlement will be your next best option.

A debt settlement company will negotiate with your creditors and “settle” your debts for less than the full amount you owe, while leaving you with one manageable monthly payment.

On average, debt settlement customers end up debt-free while paying an average of 80% of the total debt they owe, including all fees.

For example, if you have $10,000 in unsecured debt, you could end up completely debt-free while paying a total of $8,000.

READ MORE: Best debt settlement companies

Other Options

Submit a loan application with a co-signer
Apply for a different type of loan, like a 401(k) loan, a home equity loan or a home equity line of credit (HELOC)
Debt snowball or avalanche
Personal loan
Consult a credit counselor
Debt Management Plan
Bankruptcy

The Bottom Line

It can be confusing when your debt consolidation loan application was denied, particularly if you have a good credit score. But other factors are involved, including how much money you have and your total debt.

Before you start the application process, add up your debts, calculate your debt-to-income ratio, and ensure your credit utilization isn’t too high. If your numbers seem ominous, you may be better off giving up on a debt consolidation loan and instead seek out a longer-term personal loan. It’s not the type of loan you get that matters – it’s taking those first steps and staying the course until your debts have been paid off.

11 Reasons Why Your Debt Consolidation Loan Was Denied