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. Facing a cash shortfall is daunting, and having your loan application denied can feel like a personal rejection. But the truth is, it's something that happens to many people.
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 happen to 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 need to make a few financial adjustments to meet their threshold.
And, 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 Common Personal Loan Rejection Reasons
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 tells 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.
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. This means 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 have the ability to 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), for making investments such as in stocks, or 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 get denied.
Make sure all of your paperwork is in order before you apply again. You may end up not needing some of it, but better to have it handy just in case.
6 Actions to Take If You Were Declined for a Personal Loan
If your 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 approval 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 in your credit report led to the decline, 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 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 no 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 who has 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 credit score boost each month 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 get your application approved. 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’re able to 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.
Advice From LendingClub Members
Many LendingClub members have been declined on their first try. But they didn't give up, and neither should you. As you can see, a lot of factors play into whether or not you are approved for a loan. We’re here to help you make the journey to better financial health. Here are a few inspiring stories from some of our members who didn’t give up:
Very strict underwriting, but if accepted into the club? WOW! You are taken care of. Don't give up if you don't get in the first time or second. Keep going and be on the lookout, once you're in they'll be offering incredible options for your finances forever.
– Gary, a member from California*
My need for debt consolidation came about as a result of a difficult personal situation, and my profession and work structure is not typical. LendingClub was not able to get me approved about 9 months ago, but they did provide me with some advice and an invitation to reapply after 6 months. After taking the advice and keeping on plan…they closely reexamined my atypical conditions. Their professional and thorough process has made it possible for me to put difficult times in the rearview mirror.” – Jim, a member from Texas*
The first time I was so hurt when my loan was not approved. Then I got an email saying try again, so I did. Got a call a couple days later saying…you are approved. I can’t explain the joy of now being back in control.” – Ava, a member from Florida*
The first time I applied, I was denied because I was not in a position to handle a loan. A few months down the line, I re-applied and was approved for a number of different loans (varying amounts, different lengths of time, and slightly different interest rates/APR). I chose the one that was best for me. In a few days, I had my loan! I consolidated my credit card debt, and now I can afford to buy a car in a few months, and down the line, to save for a down-payment on a house.” – Kearston, a member from Pennsylvania*
See more LendingClub member reviews.
*Individual results may vary.