What to do if you’re declined a personal loan

If you’ve been turned down for a personal loan—don’t panic, and try not to worry. The first thing to know is that having your loan application denied doesn’t define you as a person. Lenders must set minimum qualifications for all loan approvals. If you fall just shy of those qualifications, you may be declined.

That doesn’t mean you aren’t smart with money or financially responsible. It just means you must make a few financial adjustments to meet their threshold. Just because your loan application was declined this time doesn’t mean it has to be your last chance. In fact, there is a lot you can do to improve your odds of being approved. 

6 Reasons you might be declined for a personal loan  

1. Bad credit history 

When it comes to any loan—mortgage, student loan, or personal loan—credit history is the number one factor lenders consider. Your credit history is the primary way lenders evaluate how likely you are to repay (or default on) a loan. If you’ve had credit hiccups in the past (e.g., past due accounts, collections, bankruptcy) your credit score may not meet the lender’s minimum requirements. You can order your credit reports free of charge through AnnualCreditReport.com to see where you can improve your credit score. 

2. High debt-to-income ratio 

Even if your credit history is OK, and you have made all your monthly payments on time, you may have your loan application denied if your debt-to-income ratio (the sum of all your debts divided by your monthly income) is too high.  Generally, a low DTI (under 40%) signals to lenders a healthy balance of debt to income.

To calculate your debt-to-income ratio, add up all your current debt—including credit cards, auto loans, and student loans—and divide it by your income. If your DTI is too high, paying down debt drops your credit utilization ratio and improves your debt-to-income ratio, increasing your chances of approval. 

3. Unstable employment history

 Lenders generally want to see that any income listed on your application has been consistent so they can assume it will remain so moving forward. If you have different pay stubs, recently changed jobs (in the last 60 days), or have freelance work from multiple employers, it may create a snag in your income calculations.

If your income fluctuates because you’re self-employed or do seasonal work, that doesn’t mean your application will always be declined. While your paychecks may not be consistent or predictable, some lenders may be willing to look at your past tax returns so they can compare your income over a longer period of time. 

4. Minimum income requirement not met 

Along with income stability, lenders look for proof of income to verify you can repay what you borrow. If your income is below the lender’s threshold, you may be denied, or offered a loan for a lower amount. Make sure you include all forms of income in your next application, including any income from side gigs, investment accounts, or child support payments. 

5. Loan purpose mismatch 

Personal loans provide a lot of flexibility in how you can use the funds. However, some lenders may not allow you to use them for certain things like:  

• Secondary education (i.e., college tuition) 

• Making investments such as in stocks 

• Anything illegal or partially illegal (i.e., gambling).  

Make sure the loan application matches your purpose. For example, if you need funds for a professional certification or training, looking into a private or federal student loan may be more appropriate. 

6. Missing information or paperwork 

Loans almost always require several forms of paperwork, including employment and income information (including tax returns, pay stubs, or bank statements), a credit report, government-issued ID, and in some cases collateral documentation. If you are missing some of this information, you are essentially guaranteed to be denied. Make sure all of your paperwork is in order before you apply for a personal loan again. You may end up not needing some of it, but it's better to have it handy just in case. 

How to improve your chances of getting approved for a personal loan 

If your new loan application was denied for any of the reasons above, here's a short checklist of action items you can go through to improve your chances of being approved next time. 

1. Review your decline notice. 

The very first thing you should do is understand why you were declined for a personal loan. Any lender who denies loan approval is required to send an adverse action notice, which lists the reason(s) your application was declined. If you were turned down because of something on your credit report, this notice will tell you what led to the decline in your credit report and the name of the credit bureau that reported the information. Because of the decline, you are eligible to receive a free copy of your credit report. 

2. Review your credit report. 

Check your credit report for errors and dispute any inaccuracies about your personal finance history with the credit bureau. At least one in five consumers have an error on their credit reports, according to a study by the Federal Trade Commission.  

For example, it’s possible someone else’s account information could have been included in your report. Or, if you filed for bankruptcy in the past, be sure your report does not include accounts that have been discharged.  Keep an eye out for inaccurate account information. If you paid a bill on time that is reported late, for example, you can dispute that information with the reporting credit bureau.

Closed accounts reported as still active could have a negative impact on your credit score if the account has negative information. Go over not only each account, but your account history as well.And always be on the lookout for any signs of identify theft such as unfamiliar accounts, purchases you didn’t make, and credit applications you didn’t complete. 

3. Boost your credit score. 

If your loan application was denied despite an accurate credit report, it could be your credit score is too low. Common reasons include: 

Late payments: 

If you've missed payments, be sure to get caught up, and continue making on-time payments. Late payments can stay on your credit file for up to seven years. 

Debt-to-income ratio:

Are your credit balances high compared to your income? Pay down your debts as quickly as possible to lower your DTI and total credit utilization. (Struggling with debt? These creative ways to pay down debt can help you pay down your balances faster.) 

Credit utilization: 

Are your cards close to their maximum limits? Remember, it's not just total credit utilization that matters, but each account limit. Try to bring all your credit balances below 30% for a score boost. 

Recent inquiries: 

Have you been applying for credit a lot recently? Business loans, home loans, auto loans? Too many hard inquiries in a short period of time will hurt your credit score and may signal that you’re in financial trouble and need cash quickly. Limit applications to only what you need, and try again in a few months. 
 
Remember, a hard credit inquiry will impact your credit, but a soft inquiry won’t. Most applications are hard inquiries, while pre-approvals are soft inquiries. Learn more about the differences between a hard and soft inquiry. 

Lack of credit history: 

If you just don't have enough credit history, consider becoming an authorized user on the account of a spouse or parent with good credit. Make sure the account you sign onto has a good payment history—the older the account, the better. You may also consider a secured credit card, which lets you put down a deposit and borrow against it. The limit may not be high, but you’ll earn a monthly credit score boost as you make payments on time. 

4. Find a co-signer. 

If you don’t have a steady income, have had some financial setbacks, or are still building a good credit history, applying with another person could help approve your application. Applying with a cosigner or co-borrower might even help you secure a better loan than what you would’ve received on your own, i.e., a better rate, a higher loan amount, or both. 
 
And there are additional factors to consider when applying for a joint personal loan. For example, both individuals are obligated to repay the loan, and both have rights concerning the funds. Here’s what you need to know about applying with a cosigner or co-borrower. 

5. Apply for a smaller loan amount. 

Consider asking for a smaller personal loan than what you need or asked for previously. A smaller loan will appear less risky to a lender, and may help improve your overall DTI picture which could help you qualify. While applying for less than you need may delay reaching your goal as quickly as you had hoped, it could turn out to be the more financially responsible path. For example, if you can start paying down debt with a smaller loan at a lower rate sooner rather than later, that's a step in the right direction. Always consider all possible options, and run the numbers given your personal financial situation. 

6. Shop around. 

Not all lenders have the same lending criteria and requirements. Rates, fees, and terms can also vary widely from lender to lender. By shopping around and comparing several loan offers against each other, you could end up saving hundreds, or even thousands, of dollars over the course of your loan. And after working through steps 1-5 above, you may want to try applying through a different lender simply to see if that makes any difference. 

Personal loan rejection reason FAQ 

Still have questions? Some of these commonly asked questions may provide the answer. 

Why does a personal loan get rejected? 

Many factors go into determining eligibility for a personal loan. The most common reasons for rejection include a low credit score or bad credit history, a high debt-to-income ratio, unstable employment history, too low of income for the desired loan amount, or missing important information or paperwork within your application. Your loan could also be rejected if the purpose isn’t for an eligible reason—like trying to take out a personal loan for investing. 

What should I do if my loan application is rejected? 

Lenders are required to provide an explanation letter for rejected applications. If you’re rejected, read through the letter and determine what can be remedied. For example, you can work to improve your credit score or pay down high-interest debts to improve your debt-to-income ratio. You can also try to reapply with a cosigner—someone with a high credit score and a secure income—or opt for a joint personal loan, where co-borrowers share both the loan funds and responsibility for repayment. Both can increase your chances of approval. 

Why was my loan declined? 

Personal loans can be declined for many reasons, but in most cases it’s due to a poor credit score or unreliable credit history. Before reapplying, take a look at your credit report (you’re allowed one free report per year from Equifax, Transunion, and Experian). If your score is less than good (660 or less), try taking some time to improve it. If you see any errors on the report, dispute them immediately with the three major credit bureaus. 

How can I avoid being rejected for a personal loan? 

Lenders look at your credit score, debt-to-income ratio, income, employment history, and credit history as key markers in determining loan eligibility. If possible, work to improve your personal finances before applying or opt for a joint personal loan with a creditworthy co borrower to strengthen your application. 
 
If you’re concerned about being rejected for a personal loan, consider checking your rate online first. Checking your rate won’t affect your credit score and can help determine eligibility before you apply.