Don’t let a personal loan denial bring you down. Take the steps toward improving your credit history and obtaining a new loan.
Getting 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 a loan.
The Equal Credit Opportunity Act requires lenders to provide you a written explanation of why you were denied a loan. If the lender does not provide this document, you have 60 days to request it. This explanation will be useful in determining whether there’s a problem in your credit report.
A personal loan is not always denied because of poor credit. Other common problems include:
- Errors in your credit report. Inaccuracies of reported 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 credit card issuer is unable to verify your details and move forward with the application process.
- High 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.
- Did not meet basic requirements. Most personal loans come with age, minimum annual income, residency and other requirements.
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 whether you’re a good investment choice and can pay off the balance each month.
Before you reapply for a loan, you should order and examine your credit report for accuracy. You are entitled to a free copy of your credit report every year from the three nationwide credit reporting companies:
You will 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 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 and creditors that you can handle your finances intelligently. 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.
Carefully 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 across the many different lenders out there. You always 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 reapply before addressing the issues that underlie your loan denial. Each time you apply for a loan, the lender will conduct what’s called a “hard pull” on your credit score, potentially affecting your score for a year. If you continuously apply and are denied for loans, 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 in the comparison table below to see if any of them fit your needs.
Compare installment loan options
4. Take some time to address your finances.
Each time you apply for a loan, the lender will conduct what’s called a “hard pull” on your credit score, potentially affecting your score for a year. If you continuously apply and are denied for loans, you could further lower your overall credit score.
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, or 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 — which 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 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’s 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%, though under 20% is ideal.
- You’re self-employed. While being 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 that just don’t compute if you accidentally wrote the wrong Social Security number or put the wrong address. All the more reason to review your application before you hit “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 debts.
- Make all payments on time. If you successfully continue to make on time payments, you’ll not only avoid late fees. Lenders will also 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 are having 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.
If you need to move high-interest debt, a balance transfer could be a reasonable alternative.