Your Money Matters Q&A: Understanding loan rejections and what to do next

In today's Your Money Matters, we spoke with Sarah Foster, a principal writer at Bankrate, to discuss the challenges many Americans face when applying for loans. Around 45% of Americans have experienced rejection in the past year, and understanding why can help individuals take steps to improve their financial standing.

Q: How many Americans have been rejected for a loan, and what types of loans are affected?

A: Over the past 12 months, nearly half of Americans who applied for a loan or financial product reported being rejected. The hardest-hit category was credit limit increases, with about half of applicants being denied. In contrast, insurance applications had a lower rejection rate, with only about one in four applicants being turned down.

Q: Who is most likely to be rejected for a loan?

A: There is a strong correlation between credit scores and loan rejections. Two-thirds of applicants with credit scores below 670, which is considered fair or poor under FICO ratings, faced rejection.

Even among those with good or very good credit, nearly half were denied. Younger generations, parents with children under 18, and lower-income Americans were also more likely to experience rejections.

Q: Why are lenders being more selective with loans?

A: This trend ties back to the Federal Reserve's rapid interest rate hikes, which aim to curb inflation. Higher interest rates reduce consumer demand for large purchases like homes and cars by making financing more expensive.

Additionally, rising interest rates make lenders more cautious about who they approve for loans, as more Americans are relying on credit to cover everyday expenses.

As a result, financing rates increase, requiring borrowers to demonstrate higher income levels to qualify for the same loan amount they may have secured just a few years ago.

Q: How does a loan denial or credit increase rejection impact a person's finances?

A: About 65% of Americans who were rejected for a loan or financial product reported experiencing negative financial consequences. Roughly one in five said they felt increased stress over their finances.

Others turned to friends or family for financial assistance or resorted to riskier forms of borrowing, such as payday loans or cash advances.

While stricter lending criteria can prevent individuals from accumulating excessive debt, many Americans rely on credit to cope with inflation, which can further strain their financial stability.

Q: What steps should someone take after being rejected for a mortgage, car loan, or another major loan?

A: Many people may not realize they can request additional information about why they were denied. Only 10% of rejected applicants reported taking this step.

A good first move is to work with the lender to identify what aspects of the application caused the rejection. In some cases, errors on a credit report or application could be the issue, which may be easier to resolve by filing an appeal with credit reporting agencies or correcting inaccuracies.

Applicants can also reapply with the same lender, but if the rejection was due to a low credit score, improving financial habits is essential.

Two key factors that affect credit scores the most are keeping credit utilization low—preferably under 30% of available credit—and making timely payments on all bills. Addressing these factors can improve the chances of loan approval in the future.