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Do you need to take out a loan but worry you’ll be rejected? Is there anything you can do to reduce the odds of rejection?
Loan rejections in the US are at a record high, affecting Americans’ ability to buy cars, get mortgages, and access credit cards. Applicants can improve their chances of loan approvals by improving their credit scores, reducing credit utilization, and rebuilding their credit.
Here are some of the reasons behind the increase in rejections, and some steps you can take.
Loan Rejections Are Increasing
If it feels like it’s impossible to get a car loan, mortgage, or credit card, it’s not your imagination. Loan rejections have hit a record high in the US, making it harder for Americans to buy cars, homes, and pay for basic needs.
Background
A recent Federal Reserve survey reveals that Americans are experiencing exceptionally high loan rejection rates, with more than one-fifth (21.8%) of US loan applications denied—the highest in five years. Elevated rejection rates spanned across all loan types, including:
- Credit card limit increases: 30.7%.
- Mortgage refinancing: 20.8%.
- Credit cards: 21.5%.
- Auto loans: 14.2%
- Mortgages: 13.2%.
Rejections also rose across different age groups, hitting individuals with credit scores below 680 hardest.
Why the Rejections Are Happening
The increase in rejections reflects what experts commonly refer to as a “credit crunch“—when obtaining loans becomes more difficult and expensive due to economic influences. In this case, the increase in denials appears to be in response to factors including:
- The collapse of Silicon Valley Bank and other regional banks.
- Federal Reserve interest rate hikes to control inflation, which peaked last summer.
- Elevated interest rates increase banks’ cost to borrow money from one another.
- Concerns about a potential recession.
Experts say these conditions have made financial institutions more risk-averse and choosy about who they give loans to. Under such circumstances, it’s not unusual for banks to demand better credit scores, increase loan interest rates, or decrease credit card borrowing limits.
Lack of Confidence Among Applicants
The high rejection rates appear to have fueled applicants’ doubt about the loan approval process, with many anticipating denial of their requests as the likelihood of rejections surged across all loan types:
- 46.1% for mortgages
- 42.4% for credit limit increases
- 32.8% for credit cards
- 30.7% for auto loans
- 29.6% for mortgage refinancing
Experts say this may help explain why the overall number of people applying for credit dropped to its lowest level, 40.3%, since October 2020.
Looking Ahead
Experts say that with so many loan rejections, preparation matters. Before you apply for a loan, you should understand and address three key problems that lead lenders to deny applications:
Problem 1: Low credit score.
Solution: Review and raise your score. Before submitting applications, check your credit score at a site like Freecreditreport.com, look for mistakes on it that could lower your score, and take steps to boost it.
Problem 2: High credit utilization.
Solution: Lower your utilization. If you have large balances on your credit accounts, work to reduce them by not using credit for a while and focusing on making timely payments.
Problem 3: Poor credit history.
Solution: Rebuild your credit. This takes time and effort, but try to pay all your bills on time and consider getting a secured credit card or a credit builder loan.
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