At a Glance
Unfortunately, for a variety of situations, your personal loan application could be denied by a lender. When this happens, it’s hard not to take it personally, but keep in mind that there is a reason your application wasn’t accepted. It’s important to understand what happened so you can take steps to improve your chances for next time.
In this article, you’ll learn:
Why can you get denied for a personal loan?
Unfortunately, sometimes a lender can deny an application for a personal loan. There are a number of reasons this can happen, including:
1. Bad credit history
Your credit score and history is one of the top factors lenders consider, as it can suggest how good you may be at managing money and debt. A poor score or history indicate this may not be your strong suit and that you’d be a higher-risk borrower. Past due accounts, collections, and bankruptcy can all be red flags.
When researching lenders, make sure you meet their minimum credit requirements. If not, you’ll likely be denied. Take time to improve your score before applying if you have concerns.
2. High debt-to-income ratio
Because your DTI ratio compares your monthly debt with your monthly income, a high ratio can indicate you may struggle to afford debt repayment and new debt may not get paid. Alternatively, a lower DTI ratio may show you have a healthy balance of debt to income.
To calculate, add up all of your current debts (such as credit cards, auto loans, and student loans) and divide it by your income. The lower your DTI ratio, the higher your chances of approval.
3. You don’t meet the basic requirements
Every lender has some of the same requirements, such as a minimum age requirement (typically 18), you must be a U.S. citizen or qualifying resident, and you must be employed with a valid bank account.
However, lenders often have additional requirements such as credit score, income, or others. If you don’t meet any of these basic requirements, your application will be denied.
4. You have low income
Your income is a top indicator of your actual ability to repay a loan. If your income is too low, the lender may feel you won’t be able to afford the monthly payments (especially if you have other debts). They can deny your application if your income isn’t high enough for the money you want to borrow. Or, they may offer you a lower loan amount.
5. You are trying to borrow too much
When they look at your creditworthiness and income, lenders are determining if you’ll be able to repay a loan and how much you may be able to afford. If you try to borrow more than you can afford, a lender may deny your application.
6. Missing information on your application
While this is the most preventable reason for denial, a lender may automatically reject your application if it’s missing information or documentation. Read the application thoroughly and review it before you click ‘submit’ to ensure you’ve provided all of the requested information.
7.Your purpose does not meet lender criteria
Personal loans can be used for just about anything, but there are some restrictions. For example, you can’t use a personal loan for college tuition, it may not be able to be used for investing or gambling, and it can’t be used for illegal purposes. If your loan purpose is outside of the lender’s rules, you’ll be denied.
8. Unstable employment history
In addition to actual income, lenders will consider your employment history. They want to see consistent employment so they can assume it will remain so moving forward. If you have unstable income and/or employment from month-to-month, the lender may not feel confident you’ll have enough financial support to repay the loan. This could be having different pay stubs, recently changing jobs, or having freelance work from multiple employers.
Even if your income fluctuates because you’re self-employed or do seasonal work, your application won’t necessarily be denied. Lenders may be willing to look at past tax returns instead to compare your income over a longer period of time.
What can you do if denied for a personal loan?
Luckily, there are several things you can do if you’re denied for a personal loan:
1. Identify exactly why you were denied
Lenders who deny a loan approval are required to send an “adverse action notice,” listing the reason(s) your application was denied. Or, you can call the lender and ask to speak to a customer service representative about your denied application. Once you understand the reason for denial, you can work to improve your situation.
Note that you must inquire about the denial within 60 days of the decision; otherwise, they don’t have to provide any information.
2. Review your credit report
If your credit score or history were a reason for denial, check your credit report for any errors and dispute any inaccuracies or mistakes with the credit bureau. It’s estimated that at least one in five people have an error on their report, so it could happen.
Be sure to look for inaccurate account information, such as a bill reported late that was actually paid on time. Remember that closed accounts reported as still active can also have a negative impact, and you’ll also want to flag any signs of identity theft.
Related: How to read a credit report?
3. Improve your credit score
Almost everyone can take steps to improve their credit score, and it’s especially important to do so if you were denied because of your score.
- Make sure all of your payments are made on time.
- Lower your debt-to-income ratio and total credit utilization.
- Limit any credit or loan applications to only what you need.
- If you don’t have enough credit history, consider becoming an authorized user on the account of a spouse or parent with good credit, or a secured credit card.
Learn more: How to Improve Your Credit Score?
4. Apply for a smaller loan
Try applying for a smaller loan amount than what you initially asked for. This will appear less risky to lenders because you’re more likely to be able to pay back a smaller amount, and it can also help improve your overall DTI ratio.
This may not seem ideal because it can delay the goal you’re working toward with the loan, but it may be more financially responsible and help ensure you are approved. Paying down a smaller loan can also help your credit score.
5. Explore other lenders
Not all lenders have the same lending criteria and/or requirements. Additionally, their rates, fees, terms, and other factors can also vary. If you’re denied with one lender, shop around and compare other lenders that you may better qualify with. Applying with a different lender may make a difference, especially if you’ve worked on the reason for your initial denial.
6. Use a co-signer
If you don’t have a steady income, your credit score is too low, or you’re still building a good credit history, consider applying for a loan with a co-signer. A co-signer is taking legal responsibility for repaying the loan if you’re no longer able to. Ideally, they have a better income, credit score, etc. to help you get approved. In fact, if they are more qualified, you may be offered a lower interest rate or higher loan amount.
Learn more: Personal Loans with a Cosigner
7. Try raising your income
Even if you weren’t denied due to your income, it won’t hurt to increase how much you make. This isn’t necessarily an easy task, but some things you could try include:
- Working additional hours or shifts.
- Starting a second part-time job.
- Asking your boss for a raise.
- Starting a side hustle.
- Rent out a room in your home.
- Look for a new job.
- Turn your hobby into a business.
When should you apply for a loan again after denial?
After you’ve asked the lender why you were denied and taken steps to improve your credit, income, and application qualifications, you may be considering re-applying for the loan. Each time you apply, it will show up as a hard credit inquiry and lower your credit score, so it’s a good idea to wait some time before applying again – experts suggest waiting six months to give yourself the best chance of being approved, but at minimum you should wait 30 days.
What if you get denied a second time?
If your loan is denied a second time, ask the lender again why the denial happened again. They should provide input into why your application was denied, and like the first time, you can use this information to improve your circumstances.
Then, you should wait at least six months, if not longer, before applying for a third time. At this point, if you haven’t done so already, consider applying with a different lender.
The best ways to avoid being rejected for a personal loan is to ensure your credit score is as high as possible, your debt-to-income ratio is as low as possible, and you have a steady income and employment history. Improving your personal finances can help, as can considering applying for a secured personal loan or applying with a co-signer.
Different lenders have different lending requirements, so you may have to do more detailed research to find a lender who will accept your application. Using a broker or lending comparison website can help, as can working with a local credit union if you’re a member. Online lenders typically have more flexible requirements, so that could be an option as well.
Yes, you can continue to apply for a loan after being denied. However, it’s important to ask the lender why you were denied and work to improve your situation before applying again. Also, because an application triggers a hard credit inquiry and affects your credit score, you should wait at least six months before applying again.
Your credit report doesn’t state whether you’re approved or denied for a loan, but it will contain a hard credit inquiry for each application you submit. So, if you’re denied the first time and have to apply again, you will have two hard inquiries which can decrease your score more than if you only had one.
Yes, you can appeal a loan rejection. Before doing this, ask the lender why you were rejected and make sure you meet all of their qualifications. If you believe your application was denied because of an error on your credit report or somewhere else in your application, gather documentation that proves you qualify, contact the lender and provide information about why you qualify, and you’ll wait for the lender to review and make a decision.