Don’t let a personal loan denial bring you down. Take steps toward improving your credit history and qualifying for a new loan.
Being denied for a personal loan can leave you feeling blindsided, confused or ashamed. Rather than accepting the setback, take action to learn more and improve your financial situation so that your next application is a success.
1. Find out why you were denied
The Equal Credit Opportunity Act requires lenders to provide a written explanation of why your application was denied. If the lender doesn’t provide this document, you have 60 days to file a request. This explanation can be useful in determining if there’s a problem in your credit report.
A personal loan isn’t always denied because of poor credit. Other common problems include:
- Errors in your credit report. Inaccuracies like misreported late payments and closed accounts can lower your credit score. Review your credit report for any errors. If you discover a problem, dispute it with the three credit bureaus.
- Limited credit history. If you don’t have a credit history, lenders are more likely to deny you for a personal loan. To build your credit score, consider applying for a secured credit card designed for people with poor or no credit.
- Incorrect information on your application. Something as simple as entering your driver’s license number wrong or misspelling your residential address could mean the lender is unable to verify your details.
- Perceived financial risk. If you have a lot of expenses in comparison to your income, a lender may determine that you’re at risk of defaulting on payments.
- Didn’t meet basic requirements. Most personal loans come with age, minimum annual income, residency and other requirements that you have to meet in order to qualify.
2. Order your credit report
Your credit score forms the backbone of your overall credit history. This summary of your borrowing history is how lenders determine if you’re a good investment choice and can pay off your balance each month.
Before you reapply for a loan, you should order and examine your credit report. You’re entitled to a free copy of your credit report every year from the three nationwide credit reporting companies:
You’ll need to provide your full name, contact information, Social Security number and date of birth.
When examining your report, you could find that it shows you owe on account you’ve since paid off or have open credit cards you’ve never owned. Even small errors and typos can affect how a lender scores your default risk. Document these errors and dispute them with each of the credit bureaus.
Why are credit scores important?Higher credit scores can open up new opportunities for lending and payment options. It shows lenders that you can handle your finances. Good credit scores of 680 or more show lenders that you’ve successfully managed and paid off debt in the past, making you a good candidate for borrowing.
The main influences on your credit score are your payment history, your total debt, the average age of your credit accounts and the number and types of credit accounts that you have.
Be aware that the three credit bureaus each use proprietary algorithms when crunching the numbers in your report. This means that no two lenders will review your credit report in exactly the same way. Review your credit history annually to stay on top of making sure that lenders are seeing only the most accurate picture of your financial health.
3. Try a different lender
Requirements and eligibility criteria will vary by lender. You have the option of researching other lenders for a personal loan that could meet your needs.
But you’ll want to limit how many times you apply before addressing the issues that underlie your loan denial. Each time you apply for a loan, the lender will conduct a hard pull on your credit score, potentially affecting your score for up to a year. If you continuously apply for loans and are denied, you could further lower your overall credit score.
Installment loans tend to have more lenient eligibility requirements than personal loans and may be able to still get you the loan amount you need. Explore your options to see if any fit your needs.
Compare installment loan options
4. Take some time to address your finances
Consider waiting before attempting to apply for another personal loan. With time on your side, you can work to improve your financial situation by paying down your debts and addressing the structural issues of your finances — which can increase your chance of approval in the future.
6 reasons lenders reject personal loan applicants
- Your credit score was too low. Knowing your actual credit score ahead of time is difficult, since the only way to know your true score is through a hard credit check. On top of this, there are several different types of credit scores that lenders use and it can be difficult to know which ahead of time. It’s possible your score was lower than you thought.
- Your credit history was too short. Some lenders want to see that you have an established credit history on top of a high credit score. This translates into at least a few years of paying off debts. And the more variety, the better.
- You don’t make enough money. Many lenders have minimum income requirements, though sometimes they don’t advertise it. If a lender thinks you don’t make enough money to afford your monthly repayments, you won’t be approved for a loan.
- You have too much debt already. Your debt-to-income ratio (DTI) sometimes plays an even more important role in your application than income itself. It gives the lender a more accurate idea of how much you can pay each month. Most won’t work with borrowers that have a DTI over 43%, and many consider under 20% to be ideal.
- You’re self-employed. While self-employed applicants aren’t necessarily barred from qualifying for a loan, it can be difficult to prove you have a steady source of income. Some lenders err on the side of caution and reject applicants that can’t present a pay stub.
- There was a mistake on your application. Online lenders in particular use underwriting algorithms won’t be able to verify you if you accidentally wrote the wrong Social Security number or put the wrong address. All the more reason to review your application before you submit.
How can I improve my credit score?
- Create a solid budget. Take a deep look into your finances to understand how you might be able to lower your debt-to-income ratio and overall debt.
- Make payments on time. If you successfully continue to make payments by the due date, you’ll avoid late fees and lenders will see that you can successfully manage your finances.
- Hold off on opening new accounts. Successfully using and paying off your credit cards and loans can positively affect your credit score, but too many can signal to a lender that you’re facing financial hardships.
Don’t let a personal loan denial discourage you. Do your research and plan your finances accordingly to improve your credit score and fix any underlying issues. Once you’ve done your research and know what you need to increase your chances of approval, view some of your online personal loan options to get started on your decision.