Credible takeaways
- Not meeting a lender’s minimum credit score requirement is one reason your personal loan application may be denied.
- A lender may also deny your loan application if you have too much existing debt or insufficient income.
- You can boost your approval chances by improving your credit score before reapplying, applying with a cosigner, or taking out a secured personal loan.
Getting rejected for a personal loan can be a painful experience. But figuring out why a lender denied your loan application can help. The law requires that a lender disclose why it didn’t approve you — lenders may send written notification by mail or provide a notice of your right to request the reasons for denial — but you’ll need to ask for an explanation within 60 days of the credit decision.
Here are some potential reasons for a personal loan denial, and tips for improving your approval odds before reapplying.
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Why was my personal loan application denied?
Lenders commonly deny loan applications for one or more of the following reasons:
1. Low credit score
Lenders typically review your credit history and credit score when you apply to assess how likely you are to repay the loan. If you have a bad credit score, a lender might decide lending you money is too risky and deny your loan application.
What to do next: Review your credit report for errors and research the lender’s minimum credit score requirement before applying for a new loan. If you can wait, work to improve your credit score as well.
Check Out: Best Bad Credit Loans
2. Insufficient income
Lenders review your income to assess your ability to repay the loan. It might reject your loan application if it doesn’t think you earn enough to handle the loan’s monthly payments.
What to do next: Apply for a smaller loan amount or increase your income before applying for a new loan.
3. High debt-to-income ratio (DTI)
DTI is another crucial metric lenders consider — it’s a measure of your existing debt level relative to your gross monthly income. If you have too much debt, it signals to a lender that you’re overextended and can’t handle additional payments. Lenders prefer a DTI below 35%.
What to do next: Calculate your DTI by dividing your minimum monthly debt payments by your gross monthly income. If yours is on the high side, work on lowering it before re-applying.
4. Your loan purpose is restricted
Some lenders don’t allow you to use a personal loan for certain purposes, such as post-secondary education or business expenses. Selecting a loan purpose that the lender forbids when submitting your application will lead to rejection.
What to do next: Research which loan purposes potential lenders allow before applying. For instance, many lenders don't allow loans for business purposes.
Learn More: What Can't You Use a Personal Loan For?
Important: Lenders are required to either disclose why you were rejected for a loan or notify you of your right to request that the lender disclose those reasons, per the Equal Credit Opportunity Act. You must ask for an explanation within 60 days of the notification that your application was denied. The lender then has 30 days to send you a written explanation.
Can I reapply for a personal loan?
You can reapply for a personal loan after being denied, but contact the lender first to see if you have to wait a certain amount of time. For example, Upstart requires rejected applicants to wait at least 30 days before they reapply.
How to improve my personal loan application
Here are some steps you can take to boost chances of approval if your personal loan application gets denied.
1. Prequalify
Some lenders allow you to prequalify for a personal loan without hurting your credit score. Doing this before submitting a formal application can help you gain a better understanding of whether you’ll be approved. But note that prequalifying won’t guarantee that a lender will approve your application.
Prequalify without hurting your credit to see which lenders may be more likely to approve your application. Rates are not offers of credit, and once you formally apply, the lender will conduct a hard credit pull which could temporarily lower your score.
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2. Improve your credit score
Though improving your credit may take a while, doing so can increase your chances of getting approved and help you secure a more favorable rate. You can do this by paying all your bills on time and paying down debt, especially credit card debt.
In addition, you should review your credit reports for inaccuracies that could be lowering your score — like a payment reported as late that you paid on time. You can review your credit reports for free weekly at AnnualCreditReport.com.
Learn More: How To Pay Off Credit Card Debt
3. Lower your DTI
Paying down debt also reduces your DTI. But another way to decrease your DTI is to increase your income. Consider requesting a raise, looking for a higher-paying job, or taking on additional work.
4. Apply for a secured personal loan
Although most personal loans are unsecured, some lenders offer secured personal loans. With a secured personal loan, you provide collateral, like a bank account or home furnishings, to qualify. Since a secured loan is less risky for the lender, a lender may have more lenient eligibility requirements.
Learn More: What Is a Collateral Loan?
Important
If you fail to repay a secured loan on time, the lender could seize your collateral.
5. Apply with a cosigner
Applying for a personal loan with a cosigner — someone who agrees to be responsible for payments if you can’t make them — may improve your chances of qualifying. Not all lenders allow cosigners, so you’ll need to research those that do. Just know that a cosigner puts their credit on the line for your benefit. If you’re even late on payments, it can hurt their credit score as well as your own. And if you default on the loan, it could damage their credit and finances significantly, as well as your relationship.
Learn More:
- Co-applicant vs. Cosigner
- How To Improve Your Personal Loan Application
Three personal loan alternatives
If a lender denies your personal loan application, consider one of the following alternatives.
Credit-builder loans
A credit-builder loan is designed to help you build credit and works differently than a traditional personal loan. You don’t receive a lump sum of money from a lender upfront. Instead, the lender releases it to you once you’ve made the required loan payments. Taking out a credit-builder loan could help your chances of qualifying for a personal loan in the future.
Cash advance apps
A cash advance app can come in handy if you need a small, short-term loan that you’re able to repay on your next payday. Apps typically let you borrow up to $500 or $750, depending on the app, without a credit check, for two to four weeks.
Apps can be low- or no-cost as long as you don’t pay extra for fast funding. Cash advance APRs can be high, though, if you start tacking on fast funding fees, tips, and subscription fees.
Learn More: Types of $500 Loans
Family or friends loan
Although asking a family member or friend to borrow money isn’t ideal, they may be willing to give you a better deal than a traditional lender. Just remember to put the terms of the loan in writing, then pay it back as promised to avoid harming the relationship.
Warning
Avoid payday loans, as they tend to have exorbitant fees and are even outlawed in some states.
Denied personal loan FAQ
Can you be denied a personal loan after prequalifying for one?
Yes. Although prequalifying for a personal loan with multiple lenders is a great way to compare rate and term quotes, it doesn’t guarantee approval. Even if you’ve prequalified with a lender, review their minimum credit score and income requirements to make sure you clear them, and know the decision ultimately rests with the lender.
What do you need to get a personal loan?
To get a personal loan, you’ll generally need a steady source of income, proof of residence, and to be at least 18 years old. Ideally, you’ll also have an established credit history with a good credit score. To support your application, lenders may ask for pay stubs, tax returns, utility bills (to confirm your address), and your driver’s license.
What credit score do you need to get a personal loan?
The minimum credit score you need to qualify for a personal loan depends on the lender you're applying with. Some lenders, like LightStream, only approve applicants with a FICO score of at 700, while some lenders, like Universal Credit, may approve applicants with bad credit scores (Universal Credit’s minimum is 560). The better your credit, the higher your approval odds and chances of securing a competitive rate.
Related Articles:
- Personal Loans Guide
- Low-Income Personal Loans
- No-Credit-History Loans
- 550 Credit Score Loan
- 500 Credit Score Loan
Meet the expert:
Jerry Brown
Jerry Brown is a personal finance writer, owner of the Peerless Money Mentor blog, and a contributor to Credible. He has written for major publications such as Forbes Advisor, Business Insider, and Rocket Mortgage.
