Many or all companies we feature compensate us. Compensation and editorial research influence how products appear on a page. Personal Loans What to Do If You’re Denied a Personal Loan Updated Oct 10, 2024 13-min read Expert Approved Expert Approved This article has been reviewed by a Certified Financial Planner™ for accuracy. Written by Catherine Collins Written by Catherine Collins Expertise: Budgeting, Mortgages, Credit, Debt, Personal loans, Small business, Entrepreneurship Learn more about Catherine Collins Reviewed by Kyle Ryan, CFP® Reviewed by Kyle Ryan, CFP® Expertise: Comprehensive financial planning, tax planning, investment planning, retirement planning, estate planning Kyle Ryan, CFP®, ChFC®, is a co-owner and financial planner at Menninger & Associates Financial Planning. He provides his clients with financial products and services, always with his client's individual needs foremost in his mind. Learn more about Kyle Ryan, CFP® Being denied a personal loan doesn’t mean you’re out of options. By understanding the reasons behind the decision, you can take steps to improve your credit and finances for future applications. We’ll explore common reasons for denial and provide actionable solutions and alternatives to help you move forward. Table of Contents Skip to Section Why was my personal loan declined?10 actions to take if you’re denied a personal loanFAQ Why was my personal loan declined? When you apply for a personal loan, lenders consider many different factors when deciding whether to extend credit. They will examine your credit history, income, employment history, debt-to-income ratio, and credit score. They’ll use that information to decide whether to approve you for a loan. Here’s what you can do if you’re denied a loan: Review your loan denial letter to understand the reasons. Check your credit report for errors or outdated information. Consider alternative financing options, such as credit builder loans, secured loans, or borrowing from family. Understand why you were denied If you’re denied a loan, it’s within your rights find out why. The Equal Credit Opportunity Act (ECOA) requires lenders to tell you why they rejected your application. You’ll likely get an email, secure message, or letter that tells you why you were denied or instructions on how to find out. The Consumer Financial Protection Bureau clarifies that it’s illegal for lenders to discriminate against borrowers and deny loan applications based on race, sex, religion, marital status, or age. So if you are denied, the lender will list the reason, provide you with the credit score it used to evaluate your application, and tell you how to access a free credit report within 60 days. Common reasons lenders deny personal loan applicants include low credit scores, high debt-to-income ratio, employment gaps, low income, recent bankruptcy, and too many credit inquiries. Here’s what to do if a lender denies your loan application for one of these reasons and alternatives to consider. Reason for denial Action to takeAlternatives to considerLow credit scoreWork to improve your credit scoreCredit builder loan or cardHigh debt-to-income ratioBegin working to lower your DTISecured loan, family or friend loanEmployment gapsSeek more stable employmentSecured loan, family or friend loanLow incomeIncrease your incomeCredit union loan, credit builder loanRecent bankruptcyBeing working to rebuild your creditCredit union loan, credit builder loanToo many credit inquiriesWaitFamily/friend loan, secured loanInsufficient credit historyApply for credit builder loansCredit builder loans, secured loan It might be tempting to apply for high-interest personal loans or payday loans, but we recommend avoiding these. Payday loans make it difficult to escape the debt cycle due to their exorbitant fees and interest rates. Instead, explore the alternative lending options mentioned above, and keep reading for the steps to take if you’re denied a personal loan. Our expert’s advice Kyle Ryan CFP® Once you understand the reasons for your denial, revisit the reason for obtaining the loan in the first place. Do you need that money, and what is the opportunity cost of not having it? What are the other avenues of financing that you can look into? If you own a home, you could explore a home equity line of credit. Zero-balance transfer credit cards can be an option if your credit score is high enough. 10 actions you can take if you’re denied a personal loan If you’re denied a personal loan, your first instinct might be to apply to several other lenders to see whether you have better luck elsewhere. However, it’s important not to rush into another application until you take the time to address the reasons why a lender denied you in the first place. According to Federal Reserve data from February 2024, 18.7% of credit applicants are rejected across all types of credit applications. You’re not alone. Here’s how to improve your chances of lenders accepting your loan application. Action to takeBest forImprove your credit scoreThose denied due to a low credit scoreLower your debt-to-income ratio (DTI)Those denied due to a high DTIGet a stable, full-time jobThose denied due to employment gapsIncrease your incomeThose denied due to a low incomeLower your loan amountThose denied due to a low incomeAsk another adult to cosignThose denied due to a low credit score or incomeWaitThose denied due to a history of bankruptcy or too many recent credit inquiriesApply for a credit builder loan or cardThose denied due to a low credit score or history of bankruptcyIncrease the length of your credit history over timeThose denied due to an insufficient credit historyAsk to be made an authorized user on another adult’s accountThose denied due to an insufficient credit history 3 ways to improve your credit score If you’re denied a personal loan because of a low credit score, your lender likely sees you as a higher-risk borrower. 1. Pay all bills on time To improve your credit score, the most important action you can take is to ensure you pay all your bills on time every time. Your payment history is 35% of your credit score. Lenders love to see someone with a positive payment history, which means you’re likely to pay the lender back on time too. The amount of debt you owe makes up 30% of your credit score. This percentage is based on how much debt you have in relation to how much credit you have. Your credit score will suffer if you have high credit card debt balances or several maxed-out credit cards. 2. Pay down your debt Aggressively paying down your debt and paying your bills on time can help your credit score improve over time. 3. Consider a credit builder loan You can also apply for credit builder loans or a credit builder card to help increase your score. Ask the expert: Most common reasons for denial Kyle Ryan CFP® A low credit score is by far the most common one I have seen for a personal loan denial. To avoid or improve that, determine which factors harm your credit score, and address them. Credit utilization tends to be the easiest to improve. 3 ways to lower your DTI Your debt-to-income ratio is the amount of monthly payments you have divided by your gross income. When this percentage is too high, lenders are less likely to approve you for a loan because too much of your income is already going toward debt each month. 1. Pay down your current debt To qualify for a personal loan in the future, spend the next few months working to lower your DTI by paying down your current debt. Try using the snowball method, which means you pay down the lowest balance debts first. 2. Consider a secured loan If you have substantial assets you can use as collateral, you might qualify for a secured loan. 3. Increase your income Increasing your income as much as possible to improve your DTI is a wise step to take. Secure stable employment When you apply for a personal loan, your lender will ask about your income and compare it to the amount you’re asking to borrow. Lenders will also review your tax documents, employment history, and credit history. Lenders prefer borrowers with a history of stable employment and reliable income because they’re more likely to pay their bills. If you were denied a personal loan due to your income gaps, it’s best to wait until you secure a stable job for a few months before reapplying for a loan. It helps if your new job also has a higher income. 3 ways to increase your income You may have a good credit history but need more income to qualify for a personal loan. 1. Ask for a raise Start with your current job. Can you ask for a raise or meet with your boss to discuss what you need to do to earn a raise in the future? If increasing your income in your current position is impossible, seek other opportunities. 2. Consider a side hustle If you like your job and want to stay, you can start a side hustle or small business during your off hours. Once you have a consistently higher income, you’re more likely to qualify for a personal loan, especially if you have good credit. 3. Get a cosigner This won’t directly increase your income, but it can do so in the lender’s eyes because the lender will also consider your cosigner or co-applicant’s income. Request a lower loan amount If you were denied a loan due to a low income, consider asking the lender that denied you whether you’d qualify to borrow a lower amount. Wait to apply If you were denied due to a poor credit score, it makes sense to wait until your credit score is in the “good” or “very good” range before reapplying for a personal loan. If you were denied due to too many credit inquiries, consider waiting around 12 months from the date of the inquiries—this is often how long it takes for them to drop off on most scoring scoring models, including FICO. Rebuild your credit Lenders will be hesitant to lend you money if you have a history of bankruptcy or a low credit score. Sometimes, you must wait until bankruptcy falls off your credit report to qualify for a personal loan, which can take up to 10 years. Until then, do what you can to show that you have control over your credit. Apply for credit builder loans, credit builder credit cards, and other financial products that help people with lower credit scores or poor credit history start to rebuild. You can also ask a family member or a friend for a loan if you don’t expect to qualify for one for many years. Apply for credit builder loans to combat an insufficient credit history The Consumer Financial Protection Bureau reports that approximately 45 million consumers are either credit invisible or unscorable. This means they don’t have enough credit history to create a credit score. Insufficient or nonexistent credit history doesn’t mean you’re bad with money. It simply means you don’t have much evidence of how you handle debt on your credit report. Perhaps you’re young and haven’t had a car loan or a mortgage yet, or you pay for everything with cash. Either way, most lenders will need to see evidence of credit history before approving you for a loan. To improve your credit history, you can apply for credit builder loans or introductory credit builder cards to strengthen your credit profile over time. It can take a few months, but with the right strategy, you can improve your credit history and your score over time. This can help you be eligible for personal loans in the future. I’ve met with credit ghosts—people with little or no credit history. When applying for a loan for the first time, these people learn the hard lesson from not building their credit earlier. Kyle Ryan CFP® Alternatives to personal loans If you’ve been denied a personal loan, there are other options available that can still help you access the funds you need. Each alternative comes with its own benefits, and understanding these can help you find the best fit for your situation. Secured loan Secured loans are backed by collateral, such as a car, savings account, or other valuable assets. Because the lender has something to fall back on if the loan isn’t repaid, these loans are easier to qualify for compared to unsecured personal loans. Secured loans often come with lower interest rates, making them a solid choice if you have less-than-perfect credit. However, be aware that defaulting on the loan could result in the loss of your collateral. Credit builder loan Credit builder loans are designed to help individuals build or repair their credit. With this option, the loan amount is typically held in a savings account while you make payments. Once you’ve paid off the loan, you receive the funds. This type of loan helps establish a positive payment history, which can improve your credit score and make you more eligible for traditional loans in the future. Friend or family loan Borrowing from friends or family can be a flexible and low-cost alternative to traditional loans. These arrangements often come with lower (or no) interest rates and more lenient repayment terms. However, it’s essential to create a formal loan agreement that outlines the terms, interest rate (if any), and repayment schedule. This protects both parties and helps prevent misunderstandings that could harm your relationship. Peer-to-peer lending Peer-to-peer lending platforms connect borrowers directly with individual investors willing to fund loans. P2P loans can be a viable option for those with fair or poor credit since the approval criteria vary from traditional lenders. Interest rates and loan terms may also be more flexible, though they can be higher depending on your creditworthiness. Credit union loan Credit unions are known for offering lower interest rates and more flexible lending criteria compared to banks. If you’re a member of a credit union, you may have a better chance of getting approved for a loan, even with less-than-perfect credit. Credit unions often focus more on your overall financial health rather than just your credit score. FAQ Can I apply for a personal loan again after being denied? Yes, you can apply for another personal loan after being denied. But it makes sense first to understand the reasons behind the rejection. Common factors are a low credit score, insufficient income, or a high debt-to-income ratio. Understand why the lender declined your application and work on rectifying the issues before you try again. How long should I wait before reapplying for a personal loan? There’s no official waiting period before you can reapply for a personal loan, but it’s smart to give it a few months. Spend this time improving your credit score or lowering your debt-to-income ratio. This shows potential lenders your commitment to better financial management. Will a loan denial affect my credit score? The denial won’t hurt your credit, but a hard inquiry from the lender will. When a lender checks your credit report, it can lower your score by a few points. Multiple applications can add up to a significant drop. Planning and spaced-out applications can prevent multiple credit inquiries from hurting your score. (Multiple credit checks within a short period—often at least two weeks—will only count as one inquiry.) Can a cosigner help with my loan application? Yes, a cosigner can increase your chances of approval. This person promises to repay the loan if you can’t. Their income and credit history become a deciding factor for lenders, improving your chances. But this is a substantial responsibility—make sure the cosigner understands it. Not all lenders allow cosigners for personal loans, but some do (and others allow co-applicants). What quick steps can I take to improve my credit score before reapplying? Raise your credit by paying every bill on time, paying off debt, keeping balances low and limits high on your credit cards, and avoiding new debt. Regular credit report checks help identify and resolve any errors affecting your score. These steps can take time, but they’ll improve your chances of securing a personal loan.