Financial emergencies can strike when you least expect them, and sometimes, a personal loan can be a lifesaver. But what can you do when your personal loan application is declined? It can be disheartening and frustrating but don’t lose hope just yet!

There are several steps you can take to improve your chances of securing a personal loan, even with a less-than-stellar credit (a score of 670 or below). In this article, we’ll walk you through the next steps to get the loan you need.

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1. Check Your Credit Score

First things first, check your credit score, you need to know where you stand. Your credit score is a key factor lenders use to determine whether or not to approve you. They want to be sure that you’ll pay back the money.

The lower your score, the bigger the risk. A low score indicates either a lack of credit history or a pattern of late or missed payments, defaults, or taking on too much debt. 

Request a copy of your credit score and report from each of the three major credit bureaus – Experian, Equifax, and TransUnion. Review your report carefully for any errors, inaccuracies, or old debts. If you find discrepancies, dispute them directly with the credit bureau that issued the report. Correcting negative marks can immediately improve your score. 

Knowing your credit score can help you only apply for loans you’re more likely to qualify for.

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2. Improve Your Credit Score

Whenever you’re declined for a loan, lenders must disclose why. A common reason for rejection is that your credit score is too low. Most lenders want a good score considered 670 and higher. 

If the issue is your credit score, it’s time to raise it. Here are a few tips:

Pay your bills on time

Lower your credit utilization ratio

Pay down outstanding debts

Negotiate or pay off any debts in collection

Do not apply for any new credit accounts

Take out a credit builder loan

Report rent payments

Payment history is the most important factor in calculating your credit score. Pay all your bills on time. Set up autopay for recurring bills to help combat human forgetfulness. 

The second biggest factor is your credit utilization ratio – how much of the available credit you use. Lenders don’t want you to use a lot of credit. They want your utilization ratio to be below 30%. Pay off any existing debt and keep credit card balances low. The less debt you have, the better.

Work on your score and wait at least 6 months before you apply again. This is because each new credit application results in a hard inquiry on your credit report, which can temporarily lower your score.

It takes time to improve your score, but if you follow these tips you will be well on your way.

3. Look into Secured Loans

If you can’t get a regular loan, consider exploring secured loans as an alternative. Secured loans are backed by collateral, such as your car, savings account, or house. The collateral serves as security for the lender. Because they pose less risk, lenders are more willing to offer loans with better terms even if your credit score isn’t ideal. 

Keep in mind that if you fail to repay a secured loan, you could lose the asset you put up as collateral. Think carefully about accepting a secured loan and make sure you can make all the monthly payments.

4. Find a Co-Signer

When getting a personal loan is a struggle due to your credit history, finding a co-signer is a viable option. A co-signer with a good or excellent credit score and stable income can increase your likelihood of approval and for better loan terms. This is because the co-signer agrees to pay the loan if you default, reducing the risk to the lender.

This arrangement comes with potential risks for the co-signer since they are now equally liable for your debt. Make sure you and the co-signer fully understand the terms and that you can meet the loan obligations before involving someone else. Successfully paying off a co-signed loan can improve your credit score and benefit both parties in the long run.

5. Find a Lender With no Credit Check

Not all lenders have strict credit score requirements. Some alternative lenders look at the applicant holistically and have no credit check. Instead, they take into account other factors including your income and employment history when assessing loan applications. 

Take a look at community institutions like credit unions and local banks which offer loans with more lenient requirements. There are also a lot of online lenders who specialize in loans for bad credit.

These online lenders can be a lifeline when you need money fast but know that they typically charge higher interest rates and fees to offset the risk of lending to people with bad credit. Always consider how much the loan will cost and if you can afford to make the monthly payments before you take out a no credit check loan.

6. Reduce Your Debt

Another common reason for declined loans is your debt-to-income ratio (DTI) is too high. Most lenders want a DTI of 36% or less. A higher DTI is viewed as riskier and indicates to lenders they might not get their money back on schedule. Pay down your other debts and you’ll be in a better position next time you apply.

Consider a debt management plan (DMP) if you’re having trouble reducing your debt. A DMP is an agreement between you and your creditors, managed by a nonprofit credit counseling agency, to pay off your debts over a set period. You make one affordable payment each month to the agency and they distribute it to your creditors. Often, the agency can negotiate lower interest rates and/or get lenders to waive fees making repayment more manageable. 

A DMP is a helpful way to reduce your debts but it will cause your credit score to dip temporarily. As soon as you start making timely payments your score will start to rise. Complete the DMP and your score should go up even more.

Frequently Asked Questions

Lenders can have various reasons for declining loan applications. Some common ones include having a low credit score, a high debt-to-income ratio, incomplete documentation, a history of late payments or defaults, frequent job changes, or asking for a loan amount that is too high compared to your ability to repay.

Yes, you can still be approved in the future. Find out why you were rejected and then take steps to fix the problems. It may be as simple as staying at your job longer or maybe you need to increase your credit score. It’s important to make the necessary adjustments to increase your chances of approval.

How long you should wait before reapplying for a loan depends on the reason you were denied. In general, you should wait at least six months between applications so as not to hurt your credit score. If you were denied due to a credit score issue or an error on your credit report, waiting a few months will give you time to fix the issue. However, some lenders may allow you to reapply quickly if you have a co-signer.

A rejected personal loan application does not directly impact your credit score. That said, when you applied for the loan the lender likely did a hard credit check and this will temporarily decrease your credit score. It should bounce back in a few months. It’s important to note that multiple loan applications within a short period can have a negative impact on your credit score.

The Bottom Line

Facing a personal loan rejection can be discouraging, but it’s not the end of the road. There are proactive steps you can take to improve your chances of getting a loan next time around. But remember not to apply again too soon as multiple applications in a short time can damage your score.

Instead, focus on building your credit and reducing your debt. These steps will work wonders in your financial life. Not only will this put you in a much better position to apply again in six months to a year but will help you secure lower interest rates and more favorable terms.

If you need a loan now and can’t wait there are alternatives. Try to get a secured loan, find a co-signer, or look for a lender with more lenient requirements. You could also look into peer-to-peer lending and ask family and friends, just be sure to get a loan agreement in writing to reduce the chances of strained relationships.

There are plenty of alternatives out there to traditional loans. So go ahead and improve your credit, reduce your debt, and look into no credit check loans. They may just be the lifeline you need.

About the author

Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.