Getting a personal loan application denied can feel like an insult, but don’t take it personally. Lenders use credit and income information, as well as other factors, to determine how likely you are to repay the loan.
And if you’re new to credit or have made some past credit missteps, it could signal to lenders that you’re too much of a risk as a borrower. That said, getting denied doesn’t mean you’re completely out of options.
It’s important to know the reason for the denial and either work on improving your credit or go with a more appropriate lender.
Finding out why your loan was denied
Lenders consider several different factors when determining whether to approve your loan application. While your credit history and income tend to be the most significant factors, others can come into play as well.
Many of these notices are generic but provide you with contact information if you want more information. Don’t be afraid to ask questions and expect answers. If a lender isn’t forthcoming or transparent, something’s wrong and you should look elsewhere.”
Your credit history
Each lender has different criteria for creditworthiness. Some lenders, for instance, only offer loans to borrowers with good or excellent credit. On the flip side, others specialize in working with people with bad credit.
Most lenders have a minimum credit score requirement, and if you don’t meet that requirement, you’ll likely be denied automatically.
As a result, it’s important to know your credit score before you start applying and search for lenders based on that score.
Your credit score is just a snapshot of your credit history, though, so expect lenders to also look at your credit report for any red flags. One can be that your credit history is too new.
Without much information to go off, the lender may not be willing to commit.
Other common items that can result in a denial include:
- Foreclosure or short sale.
- Collection accounts.
- Delinquent payments.
- A high credit utilization rate.
- Several recent inquiries.
If you are denied because of your credit history, federal law requires that the lender send you an adverse action notice. This is usually done in the form of a letter or an email.
In it, you’ll get your FICO credit score from the credit bureau that the lender used to check your report, plus one or more reasons for the denial.
“Many of these notices are generic but provide you with contact information if you want more information,” says Chris McKay, chief credit officer at OppLoans.
“Don’t be afraid to ask questions and expect answers. If a lender isn’t forthcoming or transparent, something’s wrong and you should look elsewhere.”
Your annual income
Your income—and in some cases, your spouse’s income—is an important factor in a lender’s decision because it’s what determines your ability to repay the loan. There are two specific ways your income can influence your application.
The first is based on the lender’s minimum income requirement. If your annual income is below the threshold, you’ll likely be denied automatically.
The other way is how it affects your debt-to-income ratio. This number is calculated by dividing your monthly debt payments by your gross monthly income.
There’s no universal maximum—but if roughly 50% or more of your monthly income is going toward debt, you’ll have a hard time getting approved to take on more.
That’s especially the case when you’re taking out more loans to cover old ones, says McKay, who calls this practice “a dangerous path.”
While your credit and income are the most important factors for most lenders, you may be denied based on something else instead. For example, if you don’t have a stable employment history, the lender might worry about your ability to stay consistent with payments.
You may also be denied if your purpose for the loan funds isn’t allowed. For instance, some lenders won’t allow you to use loan funds for higher education costs, business expenses, gambling, or investing.
Make sure you know what the lender’s requirements are before you apply.
How to improve your chances of getting approved the second time
If you’ve just been denied a personal loan, your first instinct may be to apply for another one with a different lender. Before you do, however, it’s important to take stock of the situation and understand what needs to change for you to get approved.
Check your credit report
With an adverse action letter, you’ll get instructions for how you can get a free copy of your credit report from the bureau the lender used in its decision.
You typically get one free copy of each of your reports every year through AnnualCreditReport.com. But this extra one can help you find out if there’s anything specific that needs to be addressed.
Take a look at your report and search for areas that need your attention. Also, look for erroneous information that could be bringing down your credit score. If you find something you don’t recognize, you can contact the credit bureau to dispute it.
Check and improve your credit score
If you didn’t check your credit score as part of the application process, do it now. The number will help you determine which lenders are within your reach. And monitoring it over time can help you see how the changes you make influence your score for the better.
Improving your credit score will be largely based on the specific reasons you were denied. So focus on getting those areas back on the right track.
Here are a few other things you can do to help boost your score:
- Use your credit cards regularly and responsibly to maintain positive credit activity.
- Get current on monthly payments and make them on time going forward.
- Pay down credit card debt and keep your credit card balance low relative to your balance.
- Avoid applying for credit too often.
Shop around for lenders
If you were denied because of a lender’s minimum credit score requirement, you may be able to apply for a loan quickly after the denial.
Shop around for personal loans based on your credit situation to have a better chance of approval. This is especially important if it’s an emergency situation and you need the cash now.
At the same time, avoid working with lenders that make it too easy to get approved. “Lenders who play fast and loose with their decisions could be trying to walk borrowers into a debt trap,” says McKay. If it sounds too good to be true, it probably is.
It takes time but keeping all of your loans and credit cards in good standing is the easiest way to substantially improve your credit. Stick with it—it will be worth the effort!”
Keep in mind, though, that personal loans for bad and fair credit may charge higher interest rates. If you want to avoid that and don’t need the money immediately, consider working on improving your credit before you apply again.
The bottom line
A personal loan denial can sting. But sometimes it has more to do with a lender’s high standards than it does your financial situation.
Before you apply again, make sure you know the reasons you were denied and work on addressing them. Also, work to improve your credit and income situation in other ways to boost your chances of approval.
“It takes time but keeping all of your loans and credit cards in good standing is the easiest way to substantially improve your credit,” says McKay. “Stick with it—it will be worth the effort!”
But if you need the money now, search for lenders that are willing to work with you. Also, be sure to work with one that can help your credit situation.
OppLoans, for instance, reports all payments to the three credit bureaus, says McKay. Their rates and other terms might not be as favorable. But it’s still better than allowing an emergency need to damage your finances in other ways.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.