Personal Loan Application Denied? Here’s How to Recover
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Being denied 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 make the necessary changes to win approval the next time you apply.
6 reasons for personal loan rejection and what to do next
According to the Equal Credit Opportunity Act, lenders must disclose why they denied your application or inform you of your right to seek out such reasons. If a lender doesn’t volunteer this information, you have 60 days to ask.
Once you know why you were denied, you can prepare for next time.
Here are six common reasons you may be denied for a personal loan and how to recover.
1. Your credit score is too low
Your credit is one of the main factors a lender considers on a personal loan application. Good or excellent credit (a score of 690 or higher) and a history of paying other loans or credit cards on time will help you qualify for a personal loan, while fair or bad credit and a history of missed payments could get your application declined.
A low credit score doesn’t automatically prevent you from getting a personal loan, but interest rates are often higher for borrowers with bad credit. Credit unions and online lenders may be more likely to consider bad-credit borrowers, while banks often require good credit.
» MORE: Best loans for bad credit
How to fix it: Check your credit report for errors that could be bringing your score down, such as payments incorrectly reported as late or accounts showing the wrong balance. You can dispute errors with any of the three major credit bureaus online, over the phone or by mail. Get free copies of your credit reports from AnnualCreditReport.com or NerdWallet.
Building credit can be a slow process, but you can start by making timely payments toward all your existing debts and keeping your credit balances low. You can also build your score by:
Getting a secured credit card and making on-time payments.
Getting a credit-builder loan and making on-time payments.
Becoming an authorized user on a credit card of someone with a strong payment history.
2. Your income is too low
Lenders check your income to ensure that you can repay a new personal loan. A low income may signal to a lender that you could default on the loan.
Minimum income requirements vary across lenders, and not all lenders set specific income requirements. In general, lenders want to see that you can make your monthly bill payments, repay your new personal loan and ideally have some money left over.
How to fix it: If you have the time, consider picking up a side job such as freelancing, dog walking, tutoring or driving for Uber or Lyft.
When you reapply for a loan, include all sources of income on the application, which may include a spouse’s income, investment income, child support, alimony or military pay.
3. Your debt-to-income ratio is too high
Your debt-to-income ratio (DTI) helps lenders determine how much money you have left each month after all your other debt payments. To calculate yours, divide your total monthly debt payments by your monthly income and multiply it by 100 to see your DTI as a percentage.
Personal loan lenders often like to see a DTI of about 43% or lower, though some will accept a higher number.
How to fix it: You can lower your ratio by raising your income or paying off debt. To clear debt faster, scrutinize your budget for places to trim expenses and put the savings toward debt payments. Research different debt payoff strategies, like the snowball and avalanche methods, to find one that works for you.
4. You do not meet the lender's requirements
In addition to assessing your credit score, income and debt, most lenders have some basic criteria you need to meet to get a personal loan. To qualify for a personal loan, an applicant typically must:
Be a U.S. citizen or permanent resident.
Have a Social Security number or, in some cases, an individual taxpayer identification number.
Live in a state where the lender provides personal loans.
Be at least 18 years old.
Have a valid email address.
How to fix it: Personal loan requirements vary between lenders, but many publish some requirements in an FAQ or blog post. You can also reach out to the lender directly if you have questions about what’s required.
5. Incorrect information on your application
False information on your application, such as the wrong address or misstated income, could lead to a loan denial. Even typing mistakes can cause problems, especially if you’re off a digit on your Social Security number. Lenders generally won’t approve applications with unverifiable information.
How to fix it: It may sound tedious, but double-check everything on your application to avoid being denied over a small error.
6. You requested too much money
There are limits to how much you can borrow, and requesting too much money can be a reason your loan application is denied. Even if the amount is within the lender’s limits, it may be considered too high based on your income or DTI.
How to fix it: Personal loan amounts are often from $1,000 to $50,000. Check the lender’s minimum and maximum loan amounts before applying and use a personal loan calculator to see what loan amount and rate you’d need to get an affordable loan. Then, be sure to only request what you need and can afford to repay.
3 ways to improve your chances of personal loan approval
1. Pre-qualify
Pre-qualifying for a personal loan helps you determine if your loan application is likely to be approved. If it is, a lender will show you your potential loan amount, rate, and monthly payment before you formally apply for the loan.
Lenders conduct a soft credit check at this stage, which doesn’t affect your credit score, so you can pre-qualify with multiple lenders to compare offers and find the best deal. Lenders weigh information differently, so while you may not meet the requirements with one lender, you could qualify with another.
Once you find the best loan offer, you’ll submit a formal application and undergo a hard credit check.
2. Add a co-signer
When you add a co-signer to a loan application, the lender considers both of your credit and financial information. Adding a co-signer with better credit and income can boost your chances of personal loan approval. Consider this option carefully because your co-signer is responsible for repaying the loan if you’re not able to.
3. Secure the loan with collateral
Lenders may be more likely to approve a secured personal loan than an unsecured one because there’s less financial risk for them. If you default on a secured loan, the lender can take what you’ve put down as collateral — usually a vehicle or savings account — to recoup their losses.
» MORE: Best secured personal loans
How long to wait before reapplying for a personal loan
It’s disappointing to see your personal loan application declined, but depending on the reason for denial, it may not be wise to try again right away.
If you were denied because of a minor issue, such as a typo, reach out to the lender immediately to address the problem.
If you need to build your credit, lower your debt or increase your income, consider waiting at least one month — but likely a few months — before reapplying. Credit histories are usually updated once a month, so changes may not be reflected in your score immediately.
Lenders perform a hard credit check each time you apply for a loan, which causes your score to temporarily dip by a few points. Too many hard credit inquiries in a short period could cause future lenders to view you as a high-risk borrower.
» MORE: Best personal loans
Alternatives to personal loans
If you need to borrow money now and can’t wait to address the reasons your loan was denied, other options may be available.
Buy now, pay later: Many major retailers partner with “buy now, pay later” companies that allow you to split up a large purchase over several weeks, usually without interest or fees. This type of financing typically doesn’t impact your credit score.
Cash advance app: Borrow from your next paycheck with a cash advance app. Borrowing amounts are relatively low, but you can pay an express funding fee to get the money instantly. Some cash advance apps have a subscription fee or ask for an optional tip. Payments are usually due by your next payday.
401(k) loan: A 401(k) loan lets you borrow from your retirement account. Interest rates are low and there is no credit check, but borrowing from your nest egg reduces its growth potential over time, and you may face penalty fees if you leave your job before you’ve repaid the loan.
Family loan: Borrowing from family eliminates credit checks and high interest rates, but your relationship can be strained if the money isn’t repaid on time. Sign and notarize a loan agreement to eliminate any confusion about the repayment plan.
Local financial assistance programs: A charity or nonprofit in your area may offer assistance with housing, transportation or utility bills. Some organizations even provide low-interest loans to people in need. Use this list of local financial assistance programs to find resources near you.
Pawnshop loan: You can get a pawnshop loan using an item you own as collateral. The amount you can get will depend on the assessed value of the collateral, but you can get money instantly without a credit check. Be aware of high interest rates and fees and quick repayment terms. If you don’t repay the loan on time, you’ll lose your collateral.
» MORE: Best ways to borrow money
