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What to do if you are denied a loan

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If you applied for a personal loan and your application was denied, you are not alone. Amid rising inflation and the possibility of a recession, many Americans are struggling financially and looking for help.

Personal loan debt has increased 24 percent since 2021, but the number of borrowers is lower than in 2019. While personal loans are becoming more popular and people are racking up more personal loan debt, many people are having a hard time qualifying. If you have been denied a personal loan, there are several things you can do to improve your creditworthiness and your chances of qualifying for a loan.

Loan
Loan qualification statistics
  • Personal loan debt made up 1.1% of outstanding consumer debt in the first quarter of 2022.
  • The delinquency rate for personal loans has increased 2.68% since 2021.
  • In 2018, 76% of people who applied for personal loans were rejected.
  • A low credit score is the number one reason people get rejected for a personal loan.

Personal loan requirements

To get a personal loan, you need to meet certain requirements. When lenders decide if they want to lend to you and what terms they’re willing to offer, they need to establish your creditworthiness and likelihood of being able to repay the loan.

Some of the major factors lenders consider when reviewing personal loan applications include:

  • Collateral. While secured personal loans are less common, they tend to be a bit easier to get. Collateral for a personal loan can be any valuable asset. That item is typically used as collateral if you take the loan out specifically to pay for your home or car. Secured loans can be risky because you risk losing your asset if you default on the loan.
  • Credit score and history. Your credit score is the most important indicator of loan eligibility. Credit scores range from 300 to 850. The higher your score is, the more likely you are to qualify for loan products. Your credit score depends on your borrowing history and how reliable you are about paying back your debts.
  • Debt to income ratio. Your debt to income ratio is the percentage of your monthly income that currently goes toward paying off debt. Lenders use your DTI to predict the likelihood of you being able to pay back your loan. A DTI of 36 percent or less is considered good, but some lenders allow DTIs up to 50 percent.
  • Income. Many lenders require borrowers to have a minimum annual income. Most lenders require at least some proof of income when you apply, even if they don’t have a minimum set.
Credit score range Average APR Average loan amount
720+ 9.81% $18,812.69
680-719 16.01% $15,214.76
660-679 23.54% $11,727.69
640-659 28.93% $9,470.86
620-639 35.98% $7,350.97
580-619 54.17% $5,746.62
560-579 85.24% $4,250.88
Less than 560 135.83% $2,817.03

As illustrated in the table above, people with higher credit scores are more likely to qualify for a lender’s best APRs and highest loan amounts. Essentially, the better your credit, the better your chance of qualifying for a loan with ideal terms.

Additional documents

When you’re looking for a personal loan, there are several documents you should have on hand before applying. First, you must submit a loan application. Each lender has a unique application, and specific requirements may vary. You generally need to provide basic personal and financial information, the amount you want to borrow and the reason for the loan. You will also need proof of your identity, income and address.

Reasons personal loans are rejected

There are several reasons someone may have their loan application rejected:

  • Bad credit history: Bad credit history may indicate to creditors that you might be having trouble repaying what you owe based on past transactions. Your credit score is generally a good indicator of credit history, but lenders also look at your financial history to establish your creditworthiness.
  • High debt to income ratio: Your debt to income ratio, expressed as a percentage, is the ratio of how much income you earn per month versus your total monthly debt payments. Lenders use your DTI to determine how likely you are to repay a loan. If you have a DTI of 50 percent or higher, you might have too much debt for a lender to give you a new loan.
  • Incomplete application: Your loan rejection could be as simple as missing documentation. If you are rejected for a loan, double-check that you fully completed the application and submitted all the proper documentation.
  • Lack of proof of steady income: Consistency is key because it helps lenders understand your job landscape moving forward. Because jobs can vary depending on the line of work, lenders may look at tax returns to get a better overview.
  • Loan doesn’t fit the purpose: Lenders might have certain restrictions on what you can and can’t do with loan money. The lender may be able to offer you alternative suggestions to better fit your needs.
  • Unsteady employment history: Lenders like to see a steady income stream over time. If you are between jobs or have a history of unsteady employment, this could indicate to lenders that you may not be a reliable borrower.

What to do if you are denied

If you apply for a personal loan and are denied, there are several things you can do to improve your chances of qualifying next time.

First, you should ask the lender why your application was denied. Under the Equal Credit Opportunity Act, lenders must disclose the reason for denying your loan application as long as you inquire about it within 60 days of the decision. This is known as adverse action notice, which is the key to taking action and increasing your chances of qualifying for your next loan.

The top reasons personal loan applications get denied are bad credit, a lack of credit history, unstable income and high debt to income ratios.

Review and build your credit score

The most important thing you can do to increase your chances of qualifying for a personal loan is building your credit score. If you want to see your credit score without a hard credit check, utilize a soft credit inquiry, which allows you to see your score and credit history without damaging your credit score. When you check your report, make sure there are no errors. Check that your payments are marked as paid on time if you did pay them on time and that there are no incorrect balances.

Once you know your credit score and have reviewed your credit report, there are several things you can do to build up your credit. Make all debt payments on time, and keep credit card balances low to avoid piling on extra debt. You can also become an authorized user on someone else’s account. This can be helpful if that person has a better payment history and a low utilization rate.

Pay down other debts

Lenders typically look for a DTI under 36 percent, although some allow applicants with DTIs as high as 50 percent. If a high debt-to-income ratio impacts your ability to take out a loan, work on paying down your current debts before applying for more credit.

One way to do that is to tighten your budget and cut down on monthly credit card expenses. Talking to a financial advisor about debt consolidation is also a good idea. A debt consolidation loan could help you reduce your monthly payments by combining your debts into one loan. Ideally, the interest rate on this new loan will be lower than what you were paying before consolidation.

Look for ways to raise your income

A higher income can help lower your DTI and make you more attractive to lenders. Finding ways to supplement your income could improve your chances of qualifying for a loan. Consider asking for a raise at work, getting another job or finding a side gig. Add any household income to your full-time job when reapplying for your loan.

Compare personal loans

Various lenders have different requirements, rates, terms and fees. Research lenders and compare rates before applying to one in particular. The lender that will work best for you depends on your specific financial situation and needs. Prequalifying with a few lenders is a good idea to see exactly what you will be eligible for before applying. You can get a personal loan from online lenders, banks and credit unions. Each option caters to people with different incomes, credit scores and personal life schedules.

Prepare for your next application and prequalify

Try prequalifying with a few lenders. Although preapproval is not guaranteed approval, getting a pre-approval means that you met the initial requirements. Many lenders allow you to prequalify without impacting your credit score or making a commitment. However, pre-approval could be denied if something changes, such as your income or credit score.

When you are ready to reapply, ensure that your documentation is up to date to reflect all the hard work and changes you made. If you are still unsure if you will qualify, try finding a cosigner. This option is not just for people who don’t meet requirements- it can also give people an extra boost in getting a lower rate. However, a cosigner is responsible for paying for any missed payments.

When to apply for a loan again after denial

Each time you apply for a loan or any other type of credit, the credit application shows up as a credit inquiry on your credit report, lowering your credit score. For this reason, it is a good idea to wait a while before applying again. You should wait at least 30 days before applying again, but experts recommend waiting six months to give yourself the best chance of qualifying.

While you are waiting to reapply, you should work on resolving the reason for your loan denial. Pay down any debts, try to improve your credit score, improve your income if possible and research lenders with more relaxed eligibility requirements. If you are making payments on other debts during this time, ensure you get the most up-to-date credit reports before submitting another loan application.

The bottom line

While being denied a loan can feel like a major blow, especially if you need cash quickly, there are many things you can do to remedy the situation and improve your chances of qualifying the next time you apply.

If you need money quickly and can handle the higher interest rates, there are loans for bad credit borrowers that tend to have more relaxed requirements. However, be aware that you need to wait at least one month before reapplying for a loan after being denied and that you should only sign up for a loan if you are sure you will be able to make the monthly payments plus interest and fees. You can also try reapplying for a smaller loan amount. The lower the loan amount, the higher your likelihood of approval.

To improve your chances of qualifying for a personal loan, you can best work down your existing debt and improve your credit score and debt-to-income ratio.

Written by
Raija Haughn
Raija Haughn is an associate writer for Bankrate.com specializing in personal and home equity loans. She is passionate about helping people make financial decisions that will benefit them long term.
Edited by
Loans Editor, Former Insurance Editor