What to Do If You’re Denied a Personal Loan

Getting denied a personal loan can be a frustrating experience, especially if you’re trying to consolidate high-interest debt. The good news is that just because a lender denied your personal loan application now doesn’t mean they always will. You can take several steps to prepare your finances and credit to qualify for a personal loan in the future. 

The most important step is to learn why a lender denied your loan application. Once you know that, you can move forward and make changes. Here are some common reasons lenders might reject your personal loan application, what you can do about it, and some alternatives to consider.

Why was my personal loan declined?

When you apply for a personal loan, lenders consider many different factors when deciding whether to extend you credit. They will examine your credit history, income, employment history, debt-to-income ratio, and credit score. They’ll use all of that information to decide whether or not to approve you for a loan.

If you’re denied a loan, there are several ways to find out why. The Equal Credit Opportunity Act (ECOA) requires lenders to tell you why they rejected your application. You’ll likely receive an 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 lenders will list the reason, provide you with the credit score they used to evaluate your application and tell you how to access a free credit report within 60 days.

According to Consumer Affairs, 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	What to consider instead
Low credit score	Credit builder loan/card
High debt-to-income ratio	Secured loan, family/friend loan
Employment gaps	Secured loan, family/friend loan
Low income	Credit union loan, credit builder loan/card
Recent bankruptcy	Credit union loan, credit builder loan/card
Too many credit inquiries	Family/friend loan, secured loan
Insufficient credit history	Credit builder loans, secured loan

Although it might be tempting to apply for high-interest personal loans or payday loans, avoid these. Debt like payday loans make it extremely difficult to escape the debt cycle due to their exorbitant fees and interest rates. 

Instead, explore the alternative lending options mentioned in the chart above and keep reading for the steps to take if you’re denied a personal loan.

Ask the expert

Kyle Ryan

CFP®

Once you understand the reason(s) for your denial, it is a good exercise to 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 have a home, you could explore a HELOC. Zero balance transfer cards can also be a good option if your credit score is high enough.

What to do 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 if 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. So, you’re not alone. Here’s how to improve your chances of lenders accepting your loan application.

If you were denied a personal loan because …	Do this
Low credit score	Pay down debt and pay all bills on time
Debt-to-income ratio too high	Pay down debt, start increasing income
Employment gaps	Acquire a stable, full-time position
Low income	Increase income, lower loan amount, or ask another adult to cosign
History of bankruptcy	Wait until bankruptcy falls off your report or get a credit builder loan/card
Too many credit inquiries	Wait until past inquiries begin to drop off your credit report
Insufficient credit history	Increase credit history over time or ask to be made an authorized user on another adult’s account.

Low credit score

If you get denied a personal loan due to having a low credit score, it’s likely because your lender sees you as a higher-risk borrower. 

If you want to improve your low credit score, there are a few things you can do. The first thing to do is to ensure you pay all your bills on time every time, as 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. So, your credit score will suffer if you have high credit card debt balances or several maxed-out credit cards. 

Aggressively paying down your debt and paying your bills on time can help your credit score improve over time. Wait until your credit score is in the “good” or “very good” range before re-applying for a personal loan. Alternatively, you can apply for credit builder loans or a credit builder card to help increase your score.

Ask the expert

Kyle Ryan

CFP®

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 negatively impact your credit score and address those factors. Credit utilization is usually the easiest to improve.

Debt-to-income ratio too high

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. 

To qualify for a personal loan in the future, spend the next few months working to lower your DTI ratio by paying off some of your current debt. If you have substantial assets you can use as collateral, you might qualify for a secured loan. 

Increasing your income as much as possible or paying off debts to improve your DTI ratio is always a good idea. Try using the snowball method, which means you pay down the lowest balance debts first. 

Employment gaps

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 you’re more likely to pay your bills. 

If you were denied a personal loan due to your income gaps, it’s a good idea to wait until you secure a stable job for a few months before reapplying for a loan. It helps if your new, stable job also has a higher income.

Low income

You may have a good credit history but need more income to qualify for a personal loan. If this is you, it can be discouraging, mainly because getting a higher-paying job can take time.

However, there are a few things you can do. First, 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. 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. 

Some other options include asking another adult with a higher income and good credit to cosign your loan or asking the lender that denied you if you’d qualify to borrow a lower amount.

History of bankruptcy

Lenders will be hesitant to lend you money if you have a history of bankruptcy. Sometimes, you must wait until bankruptcy falls off your credit report to qualify for a personal loan, which can take up to ten 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.

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 non-existent credit history doesn’t mean you’re bad with money. It simply means that you don’t have a lot of 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 also 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®

I’ve also 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.

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.)

Are there alternatives to personal loans if I need quick funds?

Alternatives to personal loans include credit card cash advances, payday loans, home equity loans, and borrowing from friends or family. You also could consider a home equity, business, or personal line of credit.

Each option has its pros and cons, so it’s crucial you understand which suits your financial situation best before committing.

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.