Denied for a Loan? Here’s What to Do Next

Why lenders turn down loan applications

Lenders don’t approve or deny loans at random. Before they lend you money, they look at your finances to decide how likely you are to pay it back. If something in your application suggests a risk, they say no. These are the most common reasons.

Your credit score is too low

Your credit score is one of the first things a lender checks. Each lender sets its own minimum, and if your score falls below it, you’ll likely be denied no matter what else your application shows. A low score usually reflects other problems on this list, such as high balances or missed payments.

Your debt-to-income ratio is too high

Your debt-to-income ratio (DTI) compares what you owe each month to what you earn. To calculate it, add your monthly debt payments and divide the total by your gross monthly income (your pay before taxes).

For example, if you earn $5,000 a month and pay $2,250 a month toward debt, your DTI is 45%.

Lenders use DTI to judge whether you can take on another payment. Most lenders stop at 41%, and some go as high as 45%. Above 50%, approval is unlikely. If most of your income already goes to debt, a lender may decide another loan would stretch your budget too far.

You’re using a large share of your credit limits

Credit utilization is how much of your available credit you’re using. If you have $10,000 in credit card limits and $8,000 in balances, your utilization is 80%. High utilization tells lenders you may depend on credit to cover your expenses. It also hurts your credit score: amounts owed, which includes utilization, makes up 30% of your FICO score, according to FICO.

You have late or missed payments

Your payment history shows lenders how you’ve handled debt in the past. Late payments, accounts sent to collections, and charge-offs all suggest you might fall behind on a new loan. Payment history is also the biggest single factor in your credit score, making up 35% of your FICO score. That means missed payments can hurt your chances twice.

Your credit history is short

If you haven’t had credit for long, lenders have less information to judge you by. Length of credit history makes up 15% of your FICO score. A thin credit file doesn’t mean you’ve done anything wrong, but it can make lenders hesitant, especially for larger loans.

What these reasons have in common

Look closely, and most of these reasons come back to one thing: how much debt you already have. High balances raise your utilization, large monthly payments raise your DTI, and missed payments lower your credit score. If debt kept you from getting approved, it’s worth dealing with it before you apply again.

Start with your adverse action notice

When a lender turns you down, it can’t just say no and leave it there. It has to send you an adverse action notice, a letter or email that explains the decision. Don’t throw it away, because it’s the quickest way to find out what went wrong.

According to the Consumer Financial Protection Bureau, the notice must:

• Give the main reasons you were denied, or tell you how to get them if you ask within 60 days
• Show the credit score the lender used and the key factors that affected it, if the denial was based on your credit report
• Tell you about your right to a free copy of your credit report within 60 days
• Explain how to dispute errors on your report

Read the reasons carefully and compare them with the list above. If the notice says “debt-to-income ratio too high” or “excessive balances on revolving accounts,” the problem is your debt load, not something a different lender will overlook.

Then get your free credit report and review it. Errors happen, and an account that isn’t yours or a payment wrongly marked as late could have cost you the loan. If you find a mistake, dispute it with the credit bureau that reported it, using the instructions in your notice.

Don’t rush to apply somewhere else

When you’ve been turned down, it’s tempting to try the next lender, then the next, until someone says yes. That usually backfires.

Each application can lower your credit score

Most loan applications trigger a hard inquiry, which means the lender pulls your full credit report. Each hard inquiry can lower your score by a few points, and it stays on your credit report for up to two years. New credit, including recent inquiries, makes up 10% of your FICO score.

Several applications in a short time can also look like a warning sign to lenders, as if you urgently need money. So every time you apply again, your odds get a little worse, and the reason you were denied hasn’t changed. If your debt-to-income ratio was too high for one lender, it will likely be too high for the next one too.

If you do want to see whether another lender would approve you, look for prequalification. Many lenders can check your likely rate and approval odds with a soft inquiry, which doesn’t affect your credit score.

Watch out for lenders who target people who were just denied

A denial can put you on the radar of lenders you’d normally avoid. Payday lenders, car title lenders, and “no credit check” lenders market heavily to people who’ve been turned down elsewhere. They approve almost anyone, but they charge very high interest rates and fees that can trap you in a cycle of borrowing.

Be especially careful with any lender that:

• Guarantees approval before reviewing your finances
• Asks for a fee up front before giving you the loan
• Pressures you to decide right away

Charging a fee before you get the loan is a common sign of a scam. Legitimate lenders take their fees out of the loan amount or add them to your balance. They don’t ask you to pay before you receive the money.

If a lender won’t approve you because of your debt, a loan that costs even more won’t fix things. It’s better to deal with the debt itself.

If debt is the reason, talk to a nonprofit credit counselor

If your adverse action notice points to your debt, whether that’s a high debt-to-income ratio, large credit card balances, or late payments, another loan probably isn’t the answer. A nonprofit credit counselor can help you deal with the debt directly, and you don’t need a lender’s approval to get started.

What happens in a credit counseling session

A session with a certified credit counselor is free. You’ll go through your whole financial picture together:

• Your income and monthly expenses
• Every debt you owe, with its balance, interest rate, and minimum payment
• How much you can realistically put toward debt each month

From there, the counselor recommends a solution that fits your budget. You don’t have to know what you need going in. The counselor’s job is to figure that out.

If you have room in your budget: a debt management program

If you can afford a consistent monthly payment, the counselor may recommend a debt management program (DMP). On a DMP, the credit counseling agency works with your creditors to lower your interest rates and stop or reduce fees.

You make one monthly payment to the agency, and it pays your creditors.

A DMP isn’t a loan, so there’s no lender deciding whether to approve you, and there’s no minimum credit score to qualify. That makes it an option even when a debt consolidation loan isn’t. You still get what you were after with the loan: one payment and less interest, so more of your money goes toward the balance itself.

You usually close the credit card accounts you enroll. Most programs are designed to pay off your debt in three to five years.

If you don’t have room in your budget: other options

If even a reduced monthly payment isn’t realistic, the counselor will tell you so and walk you through other options. Those may include debt settlement, where you negotiate to pay less than the full balance, or bankruptcy. If you’re considering bankruptcy, you’ll need to complete credit counseling from an approved agency before you can file, and a counselor can explain what that involves.

Either way, you’ll leave the session knowing exactly where you stand and what your next step is, and you won’t need to hear “yes” from a lender.

What a credit counselor may recommend

A debt management program, if there’s room in your budget. On a debt management program (DMP), Consolidated Credit works with your creditors to lower your interest rates and reduce or stop fees.

You make one monthly payment to Consolidated Credit, and it pays your creditors. You don’t need a minimum credit score to qualify. The credit card accounts you enroll are usually closed, and most programs are designed to pay off your debt in three to five years.

Debt settlement, if a DMP isn’t affordable

Debt settlement means negotiating with creditors to pay less than the full balance. It can reduce what you owe, but it has real trade-offs:

• You usually stop paying creditors while you save for settlements, which damages your credit.
• Creditors don’t have to agree, and some may sue or send your account to collections.
• Settlement companies charge fees, though they can’t collect until they’ve settled a debt.
• The IRS may count forgiven debt as taxable income.

Bankruptcy counseling, if you’re considering bankruptcy

If your debt is too large for a DMP or settlement to work, bankruptcy may be the most realistic option. Federal law requires you to complete credit counseling with an approved agency within 180 days before you file. A counselor can help you understand whether bankruptcy makes sense before you take that step.

A budget plan now and a stronger loan application later

If your debt is manageable but your budget is tight, the counselor may simply help you build a plan to pay down your balances. Lower balances and on-time payments improve the same things lenders look at, so you may be able to reapply later and get a better rate.

When it makes sense to apply again

A denial doesn’t mean you can never get a loan. It means you should wait until whatever caused it has changed. Before you apply again, make sure you can say yes to these questions:

• Did you fix the reason on your adverse action notice? If the notice cited your debt-to-income ratio, your DTI should be lower now, ideally under the 41% most lenders allow. If it cited high balances, those balances should be down.
• Have any errors on your credit report been corrected? If you disputed something, wait until the dispute is resolved and the change appears on your report.
• Have you made several months of on-time payments? A record of recent on-time payments helps offset older late payments.
• Will the new loan actually save you money? Use our loan calculator to estimate your monthly payment and total interest. Then compare those numbers with what you’re paying now. A consolidation loan helps only if its interest rate is well below your current rates, and the term isn’t so long that the total interest adds up.

When you’re ready, check whether you prequalify before you submit a full application. That way, you can see your likely rate without another hard inquiry. If you’re not there yet, that’s OK. A few months of paying down debt can turn a denial into an approval at a better rate, and you won’t have to borrow under pressure.

If you’re not there yet, that’s OK. A few months of paying down debt can turn a denial into an approval at a better rate, and you won’t have to borrow under pressure.