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Getting rejected for a personal loan can feel like a punch to the gut. It’s easy to get discouraged, especially if it delays plans to consolidate debt or renovate your home.
Instead of taking the rejection personally, use it as motivation to build your credit and supplement your income so you win approval the next time you apply.
Here’s how to recover from a personal loan rejection.
Ask why your loan application was denied
Lenders are required to disclose the exact reasons why they denied your application, according to the Equal Credit Opportunity Act. If a lender doesn’t volunteer this information, you have 60 days to ask.
Two key factors lenders consider on an application are your credit and income. Your credit report may show too many missed payments, or the history may be too short. Alternatively, your debt-to-income ratio, the portion of monthly income that goes toward debt payments, could be too high.
Once you identify the reason you were denied, you can start preparing for next time.
Review and build your credit
Making timely payments toward all of your debts and keeping your credit balances low are two steps to building credit, but don’t stop there.
Check your credit report for errors: Common credit reporting errors include payments incorrectly reported as late or delinquent and accounts showing the wrong balance, according to the Consumer Financial Protection Bureau.
Get copies of your credit reports from the three major credit bureaus from AnnualCreditReport.com or see your TransUnion credit report for free with NerdWallet.
Get a secured credit card: Secured credit cards require a cash deposit that’s usually equal to the credit line. The card issuer holds the deposit in case you don’t pay your bill. These cards allow you to make credit card purchases and get payments reported to the credit bureaus.
Get a credit-builder loan: With a credit-builder loan, a lender holds the funds in a bank account while you make on-time payments toward the loan. These payments are reported to the credit bureaus, helping to build your score. You get the money only after you’ve made all your payments.
Credit-builder loans are available mostly through credit unions, community banks and Community Development Financial Institutions. Online lender SeedFi also offers credit builder loans and personal loans that help borrowers build an emergency fund.
Become an authorized user on someone else’s credit card: Ideally, the account holder has a strong payment history, and the credit card issuer reports authorized users to all three credit bureaus.
Pay down other debts
Your debt-to-income ratio helps lenders determine if you have too much debt. To calculate yours, divide your monthly debt payments by your monthly income to see your DTI ratio expressed as a percentage.
Personal loan lenders often like to see a DTI of 40% or lower.
Scrutinize your budget for places to trim an expense and use the savings to pay off debt. Avoid taking on new debt before your next personal loan application.
Look for ways to raise your income
A higher income lowers your DTI ratio and can help you qualify for a loan. You may not need to ask your boss for a raise, either.
Consider a side job such as a rideshare driver or tutor to put an extra hundred dollars or more in your pocket each month. Extra work may require the luxury of extra time, though.
When you reapply, include all sources of household income on the loan application — not just income from your full-time job. Some lenders also consider your spouse’s income, investment income, child support, alimony or military pay.
Compare personal loans
Spend a few months getting your credit in shape and rebalancing your DTI. When you’re ready to reapply, choose a lender that caters to borrowers like you.
Online lenders lend to borrowers across the credit spectrum. These loans are best for borrowers who don’t want to visit a bank branch to apply, or whose bank or credit union doesn’t offer personal loans.
Credit unions are not-for-profit financial organizations that consider your entire financial picture, and may provide cheaper loan options for bad credit (629 or lower FICO). You’ll need to become a member of the credit union before applying.
Bank loans can have low rates and discounts for customers with accounts in good standing. Banks typically prefer borrowers with good or excellent credit (690 or higher FICO).
» MORE: Best personal loans
Prepare for your next application and pre-qualify
Take a fresh approach with your next loan application.
Gather documents. Lenders need to verify information you’ve provided on your application, such as tax returns to confirm your income. Having these documents prepared can make the application process go smoother.
Verify all information. False information on your application, such as the wrong address and misstated income, could lead to a loan denial. Double-check all details before submitting your application.
Add a co-signer. If you don’t meet a lender’s credit score requirements, consider adding a co-signer with good credit to your application. This can help you qualify and get you a lower rate.
Pre-qualify. Lenders weigh information differently, so while you may not meet the credit score requirement with one lender, you could qualify with another. Pre-qualifying lets you preview your potential rate and loan amount without affecting your credit score. Online lenders commonly offer this feature, as do some banks and credit unions.
You can compare offers from multiple lenders when you pre-qualify on NerdWallet.