At a Glance

Consolidating your debts means combining multiple debts into one, more manageable loan with lower-interest payments. Doing this can help you pay off your debt faster and save you money in the long-run. Not only does this free up your budget each month, it also eliminates the hassle of keeping track of multiple payment due dates and amounts since they are now combined into one.

The process for applying for a debt consolidation loan can be complicated, but there are a number of tools and tips out there to help make it easier. You can even apply for debt consolidation loans online, which makes it faster and easier than ever.

However, approval for this loan is not guaranteed, and if you don’t meet certain qualifications, your application could be denied.

Read on to learn more about:

Debt consolidation loan denial reasons

A denied debt consolidation loan application can be frustrating. Being approved for a debt consolidation loan isn’t always guaranteed, and there are several reasons why you may not qualify for one and your application is denied. Here are a few of the most common debt consolidation loan denial reasons:

1. Poor credit score

In order to get the lowest interest rate possible, you should have very good to excellent credit (typically 740 and higher). A strong credit score shows you’re a low risk to lenders because it indicates you don’t miss payments, have a low debt-to-income ratio (DTI), keep your credit utilization low (30% or less), and have a long credit history.

Even if your credit isn’t excellent, it doesn’t necessarily mean you’ll be denied a loan. Some lenders may accept credit scores as low as 580, though your interest rates may be higher than the debt you already have and it may not be worth it.

For example, an average credit score (670-720) will likely yield a 9-11% interest rate, while a score under 600 will generally yield a 17-25% interest rate or higher.

If your credit score needs improvement, the lender may see you as higher risk and less likely to repay your loan. This may be a reason they deny your application.

2. Insufficient income

Just as you need to make minimum payments on other debt, such as a credit card, you’ll also be required to make payments on a consolidation loan. Because consolidation loan terms have an end date, and the loan must be paid back within that specific period of time, the monthly payments are higher than your typical credit card minimum payment.

As a result, your income must be sufficient to be able to cover those payments in addition to other daily and necessary expenses. Some lenders have minimum required incomes, while others use their best judgment. If they feel you don’t make enough money to make the proper payments on time, your application may be rejected.

3. Too much debt

Even though the purpose of debt consolidation loans is to help consolidate multiple debts into one that’s more manageable, saving interest and paying off your debt faster, there is such a thing as too much debt.

Most lenders only allow someone to borrow up to 40% of their gross annual income for a debt consolidation loan. This proposed loan amount will be added to your existing debt payments, and if the new loan puts you over 40%, you may be rejected.

4. No collateral

If you have a low income or low credit score, you can still get a debt consolidation loan if you’re able to provide collateral. These loans, called secured loans, help the lender feel at ease because even if you can’t repay the loan, they still have the ability to recover the funds.

Collateral you may use includes a home, car, stocks, or retirement funds. However, this can be a risky option, because if you can’t make your loan payments, the lender or bank can seize your home or other assets.

If you don’t have collateral and the lender requires it, your application will likely be denied.

5. Lack of credit history

Lenders want to make sure your credit history is free from bankruptcies, tax liens, repossessions, and foreclosures, because a messy credit history can signal to the lender that you may not be able to pay back the debts.

They also like to know that you have an established history of paying off debts on time, and some even have minimum requirements.

If you’re new to borrowing and don’t have a credit history that can prove to lenders you’re responsible, or your credit history has some blemishes, you could be denied a loan because the lender doesn’t want to take on unknown risk.

How to get a loan when you keep getting denied

Even if you’ve been denied a debt consolidation loan, it doesn’t mean you can never get approved. If you’ve been rejected, try one of the following:

  • Add a co-signer. Someone with a strong credit history, credit score, higher income, or collateral can co-sign the loan for you, and you may be approved since they meet the lender’s requirements. Depending on their financial status, they may even help you qualify for better rates or terms.

    However, not all lenders allow co-signers, and it’s a big responsibility for someone else to be partially responsible for your debt. Make sure your lender allows for this to take place, and create a plan to ensure repayment of the loan to give the co-signer peace of mind.

  • Use your home as equity. Home equity loans are a type of debt consolidation loan that allows you to use your home as equity. While this may help get you approved because the lender feels confident they will get repaid one way or another, it can be risky because you could lose your home if you don’t make the payments.

    With a home equity loan, you can typically borrow up to 90% of the value of your home, and use that to pay off student loans and other types of debt. Providing collateral can not only increase your chances of being approved, but it can also help you get lower interest rates.

  • Talk to a credit counselor. Non-profit credit counseling agencies can work with you to analyze your situation and figure out which option is best. If you work with an agency, be sure to watch out for red flags that may indicate they are a scam, such as guaranteeing debt settlement, charging high fees, or asking for payment before looking at your finances.

How to improve the chances of your application being accepted

The best way to improve the chances of your application being accepted depends on the reason it was denied in the first place.

For example, if you were denied because your credit score is too low, take these steps to improve your credit score:

  • First, review your credit report to better understand what is helping and what is hurting your score. Most credit review sites offer insight into why your score is where it is, and may provide tips to help you improve. You should also check your report for any inaccuracies that could be affecting your score.
  • Next, if you don’t already, start paying your bills on time and in full every month. Your payment history makes up about 35% of your credit score, so if you have missed payments or aren’t paying off the bill in full, this can significantly bring your score down.
  • Try to keep your credit utilization low. This is how much you’re spending compared to how much you’re able to spend. For example, if you have a $10,000 credit card limit, you shouldn’t spend all $10,000 each month. Instead, experts suggest keeping your total at least 30% or less of your total credit limit. In this case, try not to spend more than $3,000 per month.
  • Your credit history makes up 10-15% of your score because the age of your accounts helps show your credibility. If you have an older credit age, you may be more favorable to lenders. Avoid closing any accounts during this time.
  • You should also avoid any new hard credit inquiries.
  • Keep your debt-to-income ratio lower than 30%. The lower your ratio the better, because it shows you don’t spend too much of your income paying off debt.

If you were denied because you don’t generate enough income, try picking up more hours, a second job, or starting a side hustle for extra money.

If you have too much debt, try paying some down using the debt avalanche method or debt snowball method (see below) and re-apply for the loan once some of your debt is paid off. Or, if you are denied a debt consolidation loan and don’t think you’ll be able to ever meet requirements, there are other options to help you pay off your debt.

  • Debt snowball method: This method is a way to gain momentum as you pay off your debts. Start by paying off your smallest debt in full, regardless of interest rate, and continue to make the minimum payments on all of your other loans. Once that is paid off, pay off the next smallest, and so on until all of your debts are repaid.

    Use a debt snowball calculator to learn which debt to repay first, determine how much to put toward the lowest balance, and get an estimation of when your debts will be repaid.

  • Debt avalanche method: This debt repayment method has you prioritize paying off your debt balances with the highest interest rates first. While continuing to make minimum payments on your other balances, put everything extra toward the one with the highest interest rate first. Once that’s paid off, move on to the next highest interest rate, and so on until they are all paid off.

    You can use a debt avalanche calculator to decide which debt to start repaying first, and how much you can put toward that balance.

  • Debt management plan: With a debt management plan, you work with a nonprofit credit counseling agency who can work with your creditors to try and lower your interest rates and monthly payments. They’ll then create a 3-5 year payment schedule that will repay your debt in entirety.

    You’ll make monthly payments to the agency, and they will repay the creditors.

    There are pros and cons to debt management plans, so be sure to do your research before going this route.

  • Balance transfer credit card: A balance transfer is when you take a current, high-interest credit card balance and move it to a lower-interest card. The goal is that you’d save money on interest, especially because some balance transfer cards have an introductory period with 0% APR. While this works best with credit card debt, and there may be a balance transfer fee, you can likely save money in the long-run.

Commonly asked questions

Does credit card rejection hurt your score?

Being denied a credit card doesn’t necessarily hurt your score. However, most creditors review your credit report when you apply, and this may trigger a hard inquiry. Your score may decrease due to the inquiry, but this would also be the case even if you were approved for the card.