5 Reasons Your Debt Consolidation Loan Was Denied

A consolidation loan might seem like a friendly port in the financial storm for people battered with debt but that’s only the case if they can navigate a process that denies almost as many applicants as it approves.

The millions of Americans saddled with debilitating credit card debt who turn to debt consolidation loans don’t always get the helping hand they need for a variety of reasons that go beyond a questionable credit score.

“Applicants are often rejected by lenders due to a mix of low credit scores, poor employment history, lack of income relative to the amount of outstanding debts or a debt-to-income ratio exceeding 40 percent,” Paul Ferrara, senior wealth counselor at Avenue Investment Management, said. “Lenders will be wary even when an applicant fulfills one or two of the requirements by observing high fluctuations in income or a poor repayment record.”

Whatever the reason, lenders often leave applicants wondering what went wrong and what they can do about it.

Top Reasons for Debt Consolidation Loan Rejection

A debt consolidation loan, sometimes referred to as a personal loan, combines all your credit card debt into a single bill carrying a lower interest rate than each of your credit cards, which means you’re paying less every month.

Paying less every month is a help but not a fix, according to the most recent statistics on personal loans and credit card debt in America.

Nearly 50% of those taking out personal loans do so to consolidate debt, primarily credit card debt. But a 2023 Greenpath survey found a denial rate of nearly 45% for those applying for debt consolidation.

Approximately 91 million Credit Karma members with at least one credit card held a total of approximately $547.9 billion in credit card debt in the second quarter of 2025. No wonder the number of Americans holding personal loans is on the rise, up nearly 5 % from 2024. Even those who pass muster for a debt consolidation loan may not qualify for a loan large enough to eliminate all their bills.

Why?

1. Low Credit Score

Lenders might not advertise it, but most employ a minimum credit score requirement on loans. If your score is less than 670, you might be out of luck for a debt consolidation loan. Even if your score exceeds 670, a problematic debt-to-income ratio (more on that below) or payment history could derail your loan.

The easiest way to improve your credit score is paying bills on time – many financial advisors, Ferrara included, advocate making automatic payments to that end – and using less than 30% of the credit available on each card. It also helps to ask for a higher credit limit, pay off collection accounts and avoid hard inquiries on your credit report.

But it can take months to significantly improve your score.

Can you sometimes get a loan with a shaky credit score? Yes, but it will come with a higher interest rate, which defeats the whole purpose – namely lowering your interest rate.

“Work on raising your credit score,” Jimmy Fuentes, a consultant at California Hard Money Lender, said. “Pay off high interest (first), stay out of debt, and review your credit report (often.) A debt management program or a balance transfer card may be beneficial when exploring an alternative option to lower interest rates and make payments easier.”

2. No Collateral

There are two kinds of loans: secured and unsecured. A secured loan requires something of value such as a home, car or piece of property for the bank to “hold” as collateral in case you default on your loan.

Banks consider collateral an insurance policy on your loan. If you don’t have anything to offer as collateral, your loan application may be rejected

3. Insufficient Credit History

Lenders want a clue to the financial habits of a loan applicant, so they might require a minimum of two years of credit history. This includes credit cards, mortgage payments and auto loans. The more conscientious you are about paying those bills on time, the better your chances of acquiring a loan. Those with no credit history will have a difficult time with lenders.

4. Low Income

If some of the criteria lenders use to approve loan applications seem like advanced calculus to borrowers, one standard is pretty basic math.

Lenders typically look at the anticipated amount of your loan payment compared to your income, which is known as the debt-to-income ratio.

If the ratio for recurring monthly expenses is more than 36%, lenders will question whether you can afford payments on the loan or – worse – simply reject you outright as a bad risk.

5. Too Much Debt

Ask yourself this question: Would you lend money to a friend with undisciplined spending habits and a sketchy history of paying back personal loans? What about if they were asking for a large amount of money?

Well, lenders are also cautious about making large loans to consolidate debt. Loaning money to someone who already owes a lot carries risk. When the whole point of applying for a consolidation loan is to create a monthly payment that would make it easier to pay down your debt, being rejected for this reason can feel especially frustrating.

So, what should you do?

» Learn More: How to Get a Loan with a High Debt-to-Income Ratio

What to Do If Your Debt Consolidation Loan Is Denied

If your debt consolidation loan application is denied, not all hope is lost if you understand the alternatives. Reliance on professionals who can help you create a budget that pays down your debt while allowing you to live your life could be your smartest option depending on the amount of debt you carry.

The options beyond rebuilding your credit score (which is always a good idea regardless) and smart budgeting include a Debt Management Plan (DMP) with a non-profit credit counselor, debt settlement, using a home equity line of credit or simply finding a co-signer for your consolidation loan. Bankruptcy could be an option, but the repercussions to your credit rating are substantial.

“A person who is turned down in taking a loan must first start with glancing at his or her credit report line by line,” Ferrara said. “Any payment of just $500, or even a repayment of an overdue payment, can move the debt over income ratio and reflect a repayment discipline. Compact and focused actions such as this one are far more important than attempting to empty every account in one sitting.”

Speak with a Credit Counselor to Improve Your Credit Score

If you owe significant credit card debt, you are hardly alone in America as the statistics show. Just know you’re also not alone in finding a solution.

Once you’ve determined why your loan application was rejected, you can speak with a credit counselor who will help you better understand your financial situation and how to improve your credit score.

Your best bet is to find a nonprofit credit counseling agency. They offer advice on budgeting and ways to avoid problems with debt. Best of all, they do it for free.

“As long as consolidation is beyond the means, then an alternative would be structured debt management programs offered by certified credit counselors,” Ferrara said. “They make direct deals with lenders to cut down interest and can usually save 15 to 20 percent in monthly payments.”

If your debt consolidation loan was denied because you have too much debt or not enough income, create a realistic budget with a detailed plan for how you’ll use your income to help meet your goals.

That will likely involve cutting expenses or earning extra income, or both. Your budget can be your guide for finding places to reduce costs. With the internet and the availability of “gig” jobs, generating extra income is easier than ever.

Build a Budget and Cut All Unnecessary Spending

If your debt consolidation loan was denied because you have too much debt or not enough income, create a realistic budget with a detailed plan for how you’ll use your income to help meet your goals.

That will likely involve cutting expenses or earning extra income, or both. Your budget can be your guide for finding places to reduce costs. With the internet and the availability of “gig” jobs, generating extra income is easier than ever.

Having a budget is a useful tool for any responsible consumer, but it’s a must if you want to get out of debt. To make a budget, open a spreadsheet and list every source of monthly income. Then list every fixed expense you pay monthly, (like mortgage, auto loans, student loans, etc.) and variable expenses (credit cards, groceries, utility bills, gas, etc.).

Deduct the expenses from the income, and that’s the amount you can be flexible with. Flexible – but responsible. Don’t blow it on luxuries. Use it to pay down debt or save it to build an emergency fund or fund your retirement.

Having a budget and sticking to it will inevitably improve your financial picture and impress potential lenders.

Debt Consolidation Loan Alternatives

Once you have a realistic idea of how to manage your budget, you’re in a better position to look at available debt-relief options, including ones that don’t require getting a loan at all.

Debt Management Plan

Nonprofit credit counseling agencies like InCharge Debt Solutions work with your creditors to reduce the monthly payment, interest rate and penalties on your debt – without requiring a loan. It’s called a Debt Management Plan. You make a single monthly payment through the nonprofit credit counseling agency, which then makes payments to your creditors for you.

Home Equity

If you own your home and owe less than it is worth, you could qualify for a home equity loan to pay off debt. You can use the loan to consolidate credit cards and other debt while creating one monthly payment in place of several. Bonus: you’ll likely reduce both the monthly payment and the interest rate.

Debt Settlement

You, a lawyer, or another qualified representative can negotiate with your lender for a single, lump-sum payment to settle your debt for less than what you owe.

But be warned on two fronts. There are unscrupulous debt settlement firms out there, so do your homework. And know that debt settlement will cause a significant drop in your credit score and leave a stain on your credit report for seven years. It’s important to consider whether the reduced cost is worth it.

Nonprofit Debt Settlement

This program offers the same positive – paying less than what you owe – but with a significant difference: no negotiating is involved.

The lenders have already agreed to accept 50%-60% of what is owed, as long as it’s paid off in 36 months. This form of debt relief is offered by some nonprofit credit counseling agencies like InCharge Debt Solutions.

Use a Cosigner

There is strength in numbers, so consider finding someone who’ll sign on to pay the consolidation loan in the event you can’t. That won’t be just anyone off the street, of course. But with a parent or spouse or friend with a good credit history to cosign, some lenders will look more favorably on your application.

Some but not all. Other lenders will only consider applicants who can meet requirements on their own, so check with prospective lenders before pursuing a cosigner.

Balance Transfer Credit Cards

Credit card companies routinely offer balance transfer credit cards with introductory deals that allow you to take existing debt from one card and apply it to a new card at 0% interest. It’s a longshot to qualify (you need a credit score of at least 670) and the 0% rate typically lasts 6-18 months. After that, you might face a hefty interest rate applied to your balance and have to find another new credit card with a whiz-bang introductory deal.

This is basically a shell game in which you move debt to a new credit card, but it can help reduce your debt if you are diligent and pay off your debt in the introductory period.

» Learn More: Balance Transfer vs. Personal Loan

Bankruptcy

Bankruptcy should only be used as a last resort. It will damage your credit rating and stay on your credit report for 7-10 years. And because there are substantial differences between Chapter 7 and Chapter 13 bankruptcies and complex legal procedures involved, you’ll probably need to hire an attorney.

As you work to reduce your debt, realize you have options, even if you’ve been denied a debt consolidation loan. If you need help determining the best way forward, find a credit counselor from a reputable nonprofit counseling agency.

The Bottom Line

Not all debt is the product of lavish spending. Sometimes, life sabotages financial health with job loss, divorce or substantial medical expenses.

Consolidation loans can reduce debt and bring some relief from all that financial stress. But it’s not enough that you need one. Lenders aren’t in the business of making need-based approvals.

They look at your finances – everything from your credit score to your payment history to your income and any collateral you might have – and rate your ability to repay the money they’re lending you. If they see you as a significant credit risk, you are going to need a Plan B.

Fortunately, non-profit credit counselors like InCharge offer free advice to help determine the best way to repair your credit history, whether it’s through smarter budgeting, using your home’s equity or a Debt Management Plan that they negotiate with lenders on your behalf.

Or all of the above.