What to do if your personal loan application is denied

When you receive news that a lender denied your loan application, it’s normal to feel discouraged and upset. While you might know that you have the funds to make loan payments, lenders look at loan applications from an analytical perspective, which doesn’t always work out in your favor.

If your loan application is denied, it’s still possible to get approved for a loan in the future; it might just take a little extra work. Learn more about what steps to take after your personal loan application is denied.

• Common reasons why your loan application was denied
• What can you do after your personal loan application is denied?
• How to get a personal loan when you have bad credit
• Does getting denied a loan hurt your credit score?

Common reasons why your loan application was denied

Each lender has a unique calculation to determine whether a borrower is a good fit. Lenders look at two primary things when you apply for a loan: your credit score and your income. Depending on the lender, additional factors could affect your chances of having your loan approved, including:

Your credit needs some work

A shaky credit history is a common reason why lenders deny a loan application. Your credit score and credit history indicate to a lender how likely you are to repay a loan. Some common negative factors that affect your credit report and could result in an application denial include:

• Late payments — Your payment history makes up 35% of your credit score. Multiple late payments can significantly lower your credit score.
• Open collections — If you have accounts in collections, it generally means you have a history of missed payments and haven’t met your obligations to a lender. Open collections can cause your score to drop.
• High credit card balances — Having existing loans or credit cards doesn’t disqualify you from taking on additional debt. But if all your cards are nearly maxed out, it can negatively affect your credit, as you’re using almost all your available credit (known as your credit utilization ratio).
• Bankruptcy or foreclosure — If you’ve filed for bankruptcy or had a home foreclosed on, it can stay on your credit reports for up to 10 years. This can make it extremely difficult to get approved for a credit card, loan, or mortgage.
• Little or no credit history — It can be more difficult to obtain credit if you don’t have a credit history for lenders to review.
• Too many recent credit inquiries — Lenders see too many credit inquiries in a short period of time as a red flag. It could signal that you’re struggling financially or that other lenders aren’t willing to loan you money.

Your debt-to-income ratio is too high

Your debt-to-income (DTI) ratio is a percentage that shows how much of your gross monthly income is going toward your monthly debt payments. A high DTI ratio doesn't automatically mean that you’re a risky borrower, but it can indicate that your monthly budget is limited.

For example, let’s say you earn $4,500 per month and have the following debt payments:

• Home loan: $1,500
• Car loan: $450
• Credit card 1: $100
• Credit card 2: $150
• Personal loan: $275
• Student loan: $400

If you take your total monthly debt payments — $2,875 — divide it by your income and multiply that number by 100, your debt-to-income ratio is 63.8%. Most lenders prefer to see a DTI below 36%. Paying off one or more debts could lower your DTI ratio and increase your chances of loan approval in the future.

Other reasons your loan application may have been denied

In addition to your credit score, credit history, and monthly income, a few other factors can result in a lender denying your loan application:

• Employment history — Lenders are more likely to loan money to borrowers with steady employment because it likely means they have the income to repay their loan.
• Cash flow and liquidity — If your application is on the line or you need a large loan, the lender may look at your cash flow to determine whether or not you’ll be able to make your monthly loan payments.
• Length of time at current residence — Lenders typically use your address as a way to verify your identity.

What can you do after your personal loan application is denied?

While getting denied a loan can be discouraging, it doesn’t mean you won’t ever get approved for a loan. You can do things to improve your chances of loan approval the next time you apply. You’ll need to put in a bit of work, but the extra effort will go a long way toward getting approved for a loan in the future.

Ask the lender why your loan application was denied

The Equal Credit Opportunity Act requires lenders to tell you why they’ve denied your loan application if you request an explanation within 60 days. A lender will typically mail a letter outlining the specific reasons they chose not to fund your loan. The lender is also required to include your credit score in the letter.

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Find a cosigner

Lenders may approve you for a loan, and offer you a lower interest rate, if you apply with a cosigner who has good to excellent credit — typically a family member or close friend. A cosigner doesn’t get any benefit from cosigning your loan application. But their credit score could suffer if you make late payments, and they’ll be on the hook for the debt if you don’t pay.

Before submitting your application, make sure the lender you want to apply with accepts cosigners; not all lenders do.

Work on your credit

Improving your credit score and credit history can help you qualify for a loan in the future. Before you start building your credit, it’s important to know where you stand. You can request free copies of your credit report from the three main credit bureaus — Equifax, Experian, and TransUnion — by visiting AnnualCreditReport.com.

Additionally, you can take these steps to start building or repairing your credit:

• Pay your bills on time. If you have a hard time remembering to pay your bills, consider setting up automatic payments. Making regular, on-time payments can improve your credit score significantly. It might take several months to see a difference, but the positive effects are worth the effort.
• Increase your income. Earning more money isn’t always easy, but if you can make changes that earn you a higher income, you could improve your credit more quickly by lowering your debt-to-income ratio. To increase your income, you could take on a part-time job or a side-hustle, like babysitting, freelancing, or driving for a rideshare service.
• Pay off debt. Lowering your debt payments will lower your credit utilization, which can increase your credit score and loan approval odds. You can use debt payment strategies, like the debt snowball or debt avalanche methods, to pay down balances.
• Check your credit report for errors. About 5% of Americans have an error on at least one of their three major credit reports, according to a Federal Trade Commission study. While some mistakes (like misspelled names) won’t affect a credit score, some will. Check for accounts listed as open that you’ve already paid off, payments reported as late that you made on time, or unfamiliar lines of credit. You can dispute any errors with the respective credit bureau.

Wait to reapply

Don’t apply for a new loan right away. If you’ve already been denied, consider waiting a few months to reapply. While you wait, take steps to pay off debt, build your savings, and increase your monthly income.

Prequalify with several lenders

When you’re ready to reapply for a loan, prequalify with several lenders. Prequalifying can protect your credit from additional dings if your score isn’t quite high enough. Lenders use a soft credit pull when you apply for prequalification, which won’t hurt your credit. Prequalifying with multiple lenders allows you to compare rates and loan terms to make sure you’re getting the best deal for your situation.

How to get a personal loan when you have bad credit

Having bad credit can make it challenging to get a loan because lenders may consider you less likely to pay them back if they loan you money. A low credit score typically indicates a history of late or non-payments, which puts the lender at higher risk for financial loss. Lenders don’t know your personal history, so even if your credit score is low for reasons outside your control, they won’t always know that or consider the reasons when determining your eligibility.

Some lenders specialize in lending to borrowers with bad credit. But if you’re approved for a loan, you’ll probably receive a higher interest rate than someone with a stronger credit history. A higher interest rate also means you’ll have a higher monthly payment and pay more interest over the life of the loan.

If you need a personal loan and have bad credit, here are a few steps you can take:

1. Review your credit report and dispute any errors before applying for a loan.
2. Ask a friend or family member to cosign.
3. If you can’t find a cosigner, consider applying for a secured loan. You’ll have to provide an asset as collateral, such as a car or your home. If you aren’t able to make your loan payments, the lender can take your collateral.
4. Collect necessary documentation.
5. Prequalify with multiple lenders and compare loan rates and terms.
6. Choose a lender and submit your application.

Borrowers with bad credit are at a higher risk for predatory lending. Some lenders may offer no-credit-check loans, such as payday lenders or title loan lenders, but these loans will only make your financial situation more complicated. They can come with interest and fees that equate to an annual percentage rate (APR) of 400%, according to the Consumer Financial Protection Bureau. You should avoid applying for this type of loan if at all possible, and make sure to read the fine print of any loan before you sign.

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Does getting denied a loan hurt your credit score?

No. Having your loan application rejected doesn’t directly affect your credit score.

But each time you submit a formal loan application, a lender will perform a hard credit check to pull your credit reports, which can temporarily lower your score by a few points.