What to Do if You’re Denied a Personal Loan

If you’ve been denied a personal loan, you might worry that you won’t be able to get the funding you need. However, it’s possible to reapply for a personal loan, even if you’ve previously been denied.

Before you move forward, however, it’s important to understand why your loan application was denied in the first place—so you can take steps to address those issues. Once any loose ends are buttoned up, you’ll more likely have your loan application approved the next time around.

Possible Reasons Why Your Loan Application Was Denied

Understanding why your personal loan was denied is the first step toward figuring out what steps you need to take to secure your funding the next time you apply. Every lender is different, and each one has its own criteria.

The good news is that if you’re denied, the lender must provide you with an adverse action notice that explains what information was used to make the decision. Below are some of the common reasons why your loan application might be denied.

Basic Requirements Not Met

Depending on the lender, there might be specific criteria that you need to meet in order to qualify for a loan. Some common basic requirements to keep in mind often include:

• Age: Most lenders require you to be at least 18 years old to qualify for a loan. However, in some states, the criteria might be different, and you might need to be 19 or 21. Double-check to see what the minimum age is for the lender and the state you live in.
• Residency: There’s a good chance that you need to be a resident of the United States to get a personal loan with a U.S. lender. If you’re a U.S. citizen, you likely meet that requirement fairly easily (unless you’re living abroad and the lender requires a U.S. address). However, if you’re on a green card or a certain type of visa, then you might need to meet additional requirements.
• Employment: Many lenders want to verify that you receive regular income. This can include a full-time job or the ability to prove self-employment. Some lenders accept part-time jobs as employment as well.
• Checking account: In many cases, a lender will ask for your checking account information to deposit your funds. But a checking account is also preferred by lenders because they can auto-deduct your payments from the account. If you don’t have a checking account, you might be denied, even if you seem like a good prospect on paper.

Some lenders might also require that you have no recent bankruptcies in order to meet basic requirements for borrowing.

Credit Score Too Low

One of the main factors that many lenders use when deciding whether to approve a personal loan is the prospective borrower’s credit score. While there are lenders that will approve you without a credit check or if you have bad credit, many lenders expect you to have a credit score of at least 640. If your credit score doesn’t meet the minimum criteria, then you could be denied.

Low Income

Not every lender has a minimum income requirement. However, even if there isn’t a minimum income criterion, how much money you make might still matter. A lender might want to know that your income is high enough to make minimum payments and eventually pay off the amount you borrowed (plus interest). If your income is too low, a lender might worry that you will eventually default.

High Debt-to-Income (DTI) Ratio

The amount of debt you have relative to your monthly income could also result in a personal loan denial. You might have a high income, but if a large percentage of that income is going to service other debts, then a new lender might worry about extending you another personal loan. Depending on the lender, it might be hard to get the best interest rates once your debt-to-income (DTI) ratio reaches 36%. After your DTI reaches 43%, you might experience more personal loan denials.

Application Mistakes

Every lender has its own application requirements, and you could be rejected if you’re missing a piece of the puzzle. If you’re supposed to upload bank statements but don’t, that could lead to a denial. Incorrect information on your application might also result in your request being rejected. Before submitting your application, review all the fields and ensure that you provide the required documentation.

Other

Finally, there might be other reasons why your personal loan application was denied. Perhaps you haven’t been living at your current address for very long, or perhaps you change your cell phone number frequently. Both of these situations might signal that you’re not stable and could be a risk to lenders.

Some lenders might ask to connect to your bank so they can gauge your cash flow. If your account is regularly overdrawn, that might also make some lenders feel nervous about approving your loan application.

What to Do Before Applying Again

If you’ve been denied for a personal loan, you might be able to reapply. Check with the lender to see whether you need to wait a set amount of time, such as 30, 60, or 90 days. Before you reapply, however, consider the following tips to increase your chances of being approved:

• Find a co-signer: Some lenders encourage you to reapply within a short period of time if you can get a co-signer. If you can find someone with good credit to agree to take over the loan if you default, you might be able to get approved when you reapply.
• Review your credit report: If you’re surprised by the information used as grounds to deny your personal loan application, check your credit report for errors. Dispute any incorrect information and make sure that mistakes are fixed before reapplying.
• Pay down some of your other debt: By reducing your other debt, especially addressing your DTI ratio, you can reposition yourself to potentially get approved the next time you apply.
• Try to avoid too many applications: You might be tempted to apply with other lenders before reapplying to one that denied you. Be aware that a lot of applications in a short period of time can result in hard inquiries that impact your credit score, further reducing your chance of securing a loan when you reapply.

Improving Your Chances of Qualifying for a Personal Loan

If you want to improve your chances of qualifying for a personal loan, there are a few things you can do to make yourself more appealing to a potential lender:

• Improve your credit score: One of the best things you can do is take steps to boost your credit score. Make payments on time and in full. Reduce your credit card debt to improve your credit utilization. If you’ve been consistent with a credit card for several months, consider requesting a credit limit increase to improve your credit utilization.
• Stay in the same place: Consider waiting to apply for a personal loan until you’ve been at your current address for at least a year.
• Manage your cash flow: Review your bills and income to see how you might be able to boost your income and improve your cash flow. With a higher income, and if you can avoid being overdrawn, you’re more likely to qualify for a personal loan.
• Get pre-qualified: In most cases, a pre-qualification won’t impact your credit score. Before turning in an official application, check to see if you can get pre-qualified. If you can’t, you might need to wait a few months until your situation has changed.
• Compare different lenders: Some lenders might be willing to give you a personal loan when others don’t. Get pre-qualified with three to five lenders and compare terms.
• Offer collateral: Not all personal lenders offer secured loans. However, if you’re having trouble getting approved, you can apply with a lender that might allow you to offer a savings account, car, or other valuable item as collateral.

A co-signer or co-borrower might also be able to help you increase your chances of approval. If you can find someone willing to share responsibility for the debt, you might be able to qualify, even if you wouldn’t have been able to by yourself.

Alternative Options to a Personal Loan

You can also look for alternatives to taking out a personal loan. Some ways to avoid the need for personal loans might include:

• Get help from family and friends: Rather than getting a personal loan, someone in your network might be willing to let you borrow from them. If this is the case, make sure you have a written agreement.
• Emergency fund: For unexpected emergency costs, consider using an emergency fund. Build an emergency fund over time so that you’re prepared for the future.
• Save up for major purchases: If you’re making a planned purchase later, consider saving up rather than getting a personal loan.
• Home equity loan: For those who own their homes, a home equity loan or home equity line of credit (HELOC) might make sense. Rather than relying on personal credit, you might be able to get access to funding by securing it with the equity built up in your home.

The Bottom Line

If you’re denied for a personal loan, you can reapply—and potentially be approved. However, before you reapply, make sure you’ve learned why your application was rejected in the first place so that you can improve your situation and increase your chances of approval.