Being denied a personal loan can be disheartening. You may worry you won’t get the cash you need and be unsure of where to turn next. However, it’s important to remember that this isn’t the end of the road. You can reapply.

Before you do, though. It’s important to understand the reasons behind the denial. When you know why the lender said no, you can take steps to fix the issues and increase your chances of approval in the future. 

Let’s go over what you can do so that you can get beyond rejection and find the money you need.

Possible Reasons Why You Were Denied

Understanding why you were denied is the first step to fixing the issues. Lenders have to send an adverse action notice that explains their decision. Take the time to read it and see what you need to address. Here are the most common reasons for declined applications.

Basic Requirements Not Met

Lenders have specific criteria you must meet to qualify for a personal loan. Common basic requirements include:

Age: You must be over 18 or in some states over 21.

Residency: You must be a legal United States resident.

Income: Most lenders want you to have a stable full-time job and meet a certain income level.

Checking account: Lenders prefer a checking account because it’s easier to deposit and deduct money.

If you fall short in any of these basic requirements, your application may be rejected outright. It’s crucial to review the lender’s prerequisites carefully before applying to ensure you meet the minimum qualifications.

Poor Credit

Your credit score is a pivotal factor in loan approval decisions. A low credit score can signal to lenders that you’re a high-risk borrower, which might lead to a denial. Many lenders require you to have a credit score of at least 640. Check their minimum credit score requirements and make sure you meet them before you apply.

High Debt-to-Income Ratio

Lenders want to know that you can afford to make monthly payments on top of your existing debts. To assess this they look at your debt-to-income (DTI) ratio. A high DTI ratio suggests that you may have difficulty handling additional debt, making you a less attractive candidate. Keep your DTI below 35% for the best approval chances.

Low Income

How much you make matters even if the lender does not state a minimum income requirement. The lender still wants to know that you can afford to repay the loan. Be sure to include all forms of income on your application: child support, alimony, disability, social security, and so on.

Application Mistakes

Errors or inconsistencies in your loan application, such as mistyped information or incomplete sections, can lead to a denial. These mistakes might raise concerns about your attention to detail or even your honesty, affecting the lender’s trust in your ability to manage the loan. Review your application carefully and make sure you uploaded the correct documents.

Boost Your Credit Score

Before submitting another loan application, take steps to enhance your appeal to lenders and increase your chances of approval.

Find a co-signer with a strong credit profile. A co-signer provides lenders with additional assurance since they will take over the loan if you default. This security net can make lenders more inclined to approve your loan and offer better terms.

Thoroughly review your credit report for any errors or areas for improvement. Disputing inaccuracies can positively impact your credit score.

Pay down existing debt to lower your debt-to-income ratio. This demonstrates to lenders that you are responsible and puts you in a much better position when you reapply.

Be cautious about submitting too many applications in a short period. Each application results in a hard inquiry which can impact your credit score reducing your chances of securing a loan.

Improve Your Chances

There are a number of ways you can improve your chances of qualifying for a loan.

Boost your credit score: Your credit score is one of the biggest factors so one of the best things you can do is improve it. Consistently make credit card and loan payments on time, keep your credit card balances low, pay off debt, and avoid any new credit applications. 

Be stable: Lenders consider people who are more stable lower risk and are more likely to lend to them. Stay at your current address for at least a year and remain at your job. 

Increase your income: Find a job that pays better, ask for a raise, or take on a second job. There are plenty of flexible schedule jobs in the gig economy. A higher income will make you a more attractive candidate.

Prequalify before you apply: Prequalification involves only a soft credit check, which does not impact your score. It can give you an idea of your chances and let you compare loan offers before you officially apply.

Compare lenders: You want to make sure that you meet everyone’s criteria and that you’ll get the best deal possible. Look for lenders who fit your financial situation and then prequalify to see what they offer.

Put up collateral: A secured loan, one that requires an asset like a house, vehicle, or savings account, is generally easy to be approved for, especially if you have a lower credit score.

Alternative Loan Options

When traditional personal loans are not an option or you can’t wait while you build credit, exploring alternatives can provide the financial support you need. 

Borrow from friends and family

Ask if someone you’re close with can lend you the money. They likely won’t charge interest and you can work out a flexible repayment plan. Always get the agreement in writing and approach it professionally to preserve relationships.

Seek Peer-to-peer (P2P) lending

These platforms connect borrowers directly with individual lenders. Often, the lenders offer competitive rates and terms, especially for borrowers with less-than-perfect credit scores. It’s important to research and compare different P2P lenders to find the best match for your financial situation.

Find Online lenders

Lots of lenders have moved online and specialize in bad credit loans. While the interest rates and fees may be higher, you also may be able to get the money you need the same day.

Join a credit union

Credit unions offer loans to their members which usually come with more lenient requirements and lower rates than big banks. Ask your local credit union what they have to offer.

Frequently Asked Questions

Every lender sets its own criteria but some loans are easier to get than others. High-interest loans like payday loans and auto title loans are very easy to be approved for. Some online lenders specialize in loans for borrowers with bad credit, offering more favorable terms than payday or title loans. It’s crucial to carefully review the terms and conditions, as well as the lender’s reputation, before committing to any loan.

All lenders set their own minimum credit scores. For traditional banks and credit unions, a credit score below 620 often makes it challenging to get approved for a loan. Lenders who specialize in bad credit loans and may accept scores as low as 500 or even lower.

The ideal waiting period before reapplying varies, but a general rule of thumb is to wait at least three to six months. This interval allows you sufficient time to address the reasons behind your initial denial and improve your score. Check though, because some lenders encourage you to reapply quickly if you have a co-signer.

A loan denial does not do any damage to your credit score. That said, when you applied for the loan the lender likely did a hard inquiry and this will temporarily lower your score. It should bounce back in a few months. Multiple loan applications within a short period can hurt your score. To avoid this, try to prequalify and compare lenders so you apply only to the one you want and have a good chance of getting.

Bottom Line

Being denied a personal loan is not the end. It is simply a set back forcing you to examine your financial situation and take steps to improve it. 

Build your credit, pay down your debt, find a co-signer, and increase your income. All these steps will make you a more attractive candidate and increase your likelihood of being approved next time around

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.