Denied for a personal loan? Here's what to do next

Finding out why you were denied is the first step toward getting approved next time

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What do you prioritize most?

a woman reading a denial letter

While it can be extremely frustrating to be denied a loan, especially if you need the funds quickly, there are steps you can take to get the funding you require.

Before applying for another loan, read through this guide on what to do next. We’ll review ways you might be able to work with the lender to become approved, as well as alternative funding options. We’ve also talked to a loan expert to learn what lenders are looking for and what your rights are as a borrower.


Key insights

  • If you were denied a personal loan, you can contact your lender to get the reason in writing (they are required by law to provide it).
  • Application errors can be quickly remedied by your lender and may help you avoid applying again.
  • If you need funding quickly, there are several alternative options, including secured loans, peer-to-peer lending and using a co-signer.
  • To increase your chances of approval, work to improve your credit score and pay down debts.

Contact the lender

It’s important to understand why your personal loan was denied before moving forward.

The first thing you should do is contact the lender. Under the Equal Credit Opportunity Act, the lender must provide you with a reason for the denial of your loan application as long as you inquire within 60 days of being denied. This is known as an “adverse action notice.”

This is to ensure the lender is not discriminating against you on the basis of race, color, religion, national origin, sex (including sexual orientation and gender identity), marital status, age or whether or not you receive public assistance income. While you can contact the lender over the phone, it’s best to get the reason in writing in case you need to take legal action.

Lenders are required by law to provide a reason for your loan denial if you inquire within 60 days.

"Lenders are required to send an adverse action notice that outlines the factors contributing to the denial, or you can reach out to a customer service representative to discuss the details directly,” said Chris Muller, the vice president of personal finance at XLMedia. “Gaining insight into the cause of the denial will help you take proactive steps to address the issues.”

Personal loan rejection reasons

Once you’ve gotten a written reason for your personal loan denial, you can take steps to correct any issues before applying again.

Here are a few common reasons that your personal loan may be rejected:

  • You have a low credit score
  • Your debt-to-income (DTI) ratio was too high for the lender
  • You applied for a personal loan that was too large
  • You don’t have enough regular income to qualify
  • You don’t meet the requirements set forth by the lender
  • You made a mistake or were missing info on your loan application
  • Your use for the loan was prohibited by the lender

Each of these reasons can be remedied. For example, if your credit score was too low, you can take steps to increase your score or reapply with a co-signer (if allowed). Or maybe your debt payments are too high. You can pay off a few low-balance debts to lower your DTI.

Fix any application errors

Your personal loan may have been denied due to an application error. Some common application errors include:

  • Missing personal or financial information
  • Did not upload requisition documentation
  • You indicated the loan would be used for a prohibited purpose (gambling, investing, paying for college)
  • Applying for too large of a loan

If there was an error on your application, you may be able to simply call your lender and have them correct the application without needing to perform another hard inquiry on your credit. Make sure to do this in a timely manner so that your lender can review it quickly; otherwise, you may be forced to apply again.

» MORE: How to apply for a personal loan in 5 steps

Consider short-term solutions

If you can’t wait until you’ve fixed your credit or increased your income to apply again, here are a few quick solutions to gain access to loan funds.

Maximize your assets
You may be able to use collateral for a secured personal loan, which can improve your chances of loan approval. A secured loan gives your lender the right to repossess your collateral if you fail to pay back the loan. Collateral might include:
  • Vehicle
  • Home
  • Savings account
  • Future paychecks
  • Fine art or jewelry

There are some specific types of secured loan options that let you borrow against an asset you own. Here are a few examples:

  • A home equity loan allows you to borrow against the equity in your home.
  • A life insurance loan lets you borrow against the value of your policy.
  • A 401(k) loan lets you borrow against the value of your 401(k) account.
  • A portfolio loan lets you borrow against investment balances in a brokerage account.
Team up with a co-borrower or co-signer
Utilizing a co-borrower or co-signer can help you qualify for a loan, even if your credit score isn’t great. Here’s how both can help your loan approval odds:
  • A co-borrower is someone who is fully responsible for the loan, including monthly payments. This is typically a spouse or close family member who you are splitting the loan proceeds with.
  • A co-signer is someone who signs onto the loan to help you get approved but is not expected to make payments unless you default on the loan. This can be a family member or trusted friend who has a strong credit profile and income to help you get approved.

» COMPARE: Best personal loans with a co-signer

Apply for a peer-to-peer loan or try crowdfunding
Peer-to-peer (P2P) lenders are marketplaces that allow individuals or institutions to lend money to borrowers. You may have better luck being approved for a personal loan through a P2P loan website than with a traditional lender, though the interest rates may be high and loan amounts limited.

If you have a poor credit score or high debt load, a P2P lender may still approve you for a personal loan. Each lender may have different application requirements, so make sure to review before applying.

Another option is crowdfunding . If you are raising money for an emergency need (such as medical expenses or funeral expenses), then using a website like Kickstarter allows you to share your need online with your community. Unlike a personal loan, you don’t have to pay back crowdfunded gifts, and just pay a small fee to the website you use to manage the fundraiser.

Use a credit card
If you need access to money quickly, you might be able to use a credit card instead of a personal loan.

While there are some cards that offer 0% interest for a period of time, most credit cards charge significantly higher interest rates than personal loans. Using a credit card can be helpful in the short term, but make sure you have a plan to pay it off quickly, or the high interest rate can cost you.

Ask family or friends for a loan
As a last resort, you might consider a loan from a family member or close friend. Make sure all the loan terms are in writing and agreed on by both parties. While family members and friends don’t typically charge high interest, the risk is the relationship souring if you fail to repay.

Improve your borrower profile

If you don’t have anyone who can help you get approved as a co-signer or co-borrower, and don’t have any collateral available for a secured loan, you may need to buckle down and improve your borrower profile.

“I suggest reviewing and enhancing your credit profile,” said Muller. “Your credit score holds significant sway in lenders' decisions regarding personal loan applications. If your credit score isn't where you'd like it to be, consider strategies like settling outstanding debts, making consistent payments on time and maintaining a low credit utilization rate.”

Here are a few steps you can take to improve your credit and your chances for approval the next time you apply for a personal loan:

Check your credit report and score

You can review your credit report from all three major credit bureaus for free. Going to annualcreditreport.com gives you free access to download a copy of your credit report from Equifax, Experian and TransUnion. This allows you to review the report for any mistakes and take an inventory of any debts you need to pay off. You can also get additional copies of your credit reports for free if you receive an adverse action notice after being denied a loan.

If your credit report does have errors, you can contact the credit bureau directly to get them removed. In some cases, you may need to contact the company that reported the error (such as an old debt account showing in default) and have them correct it. Clearing up credit report errors can have a significant impact on your credit score.

Your credit score holds significant sway in lenders' decisions regarding personal loan applications.”
— Chris Muller, XLMedia

Checking your credit score can be done for free with apps like Credit Karma or CreditWise. You want a score that is considered at least “good,” with a minimum of around 670. Correcting credit report errors, paying off past-due debts and keeping current on your monthly payments can help you increase your score over time. This will improve your chances of getting approved for a personal loan on a future application.

Build a strong payment history

You will most likely need to make on-time payments for a minimum of six to 12 months before seeing a big improvement in your credit score.

Your payment history accounts for a significant amount of your credit score (35% for FICO and 41% for VantageScore). Paying on time helps lenders know that you are a reliable borrower who can make the monthly payments for your obligations, lowering their risk when lending you money.

If you have a history of late or missed payments, this can hurt your credit score. Setting up payment reminders in your calendar and automatic bill pay can help ensure you never miss a payment again.

» MORE: VantageScore vs. FICO: What’s the difference?

Reduce your debt

Debt can have an impact on your credit score, and lenders look at your debt obligations when reviewing your loan application. Reducing your debt can improve your chances of loan approval in two main ways:

  • Lower DTI ratio. The less debt you have, the lower your monthly debt payments are. This means you are spending less of your income on debt payments, thus lowering your DTI.
  • Lower credit utilization. Credit bureaus consider your overall credit utilization when measuring your credit score. Paying off debt lowers your utilization.

To pay off your debt quickly, it’s best to focus on one debt at a time. Whether you choose to pay off the one with the highest interest rate or lowest balance is up to you, but paying the minimums on all other debts while focusing on paying off a single debt is the fastest path to debt freedom.

Once you have one debt paid off, you no longer have to make minimum payments on that debt, and you can use the extra funds to pay off the next debt. This increases each time you pay off a debt, helping you pay them off faster each time.

Increase your income

Lenders place a high emphasis on your income when considering you for a personal loan. Since most personal loans are not secured against assets, your income is the main asset you are using to guarantee payment. And a higher income means a lower DTI ratio as well.

While this isn’t an easy thing to do, if you’re in a position to, you may want to consider:

  • Asking for a raise
  • Applying for a promotion
  • Starting a side hustle
  • Investing in an income-producing asset (like real estate)

» MORE: How to manage your money

Research other lenders

If you’re rejected by one lender, it doesn’t mean that all lenders will reject you. You should research other lenders and find out if their requirements are more lenient. You might find a lender that has a lower minimum credit score or income requirement.

Many lenders allow you to pre-qualify for a loan online, giving you estimated rates and terms before you officially apply. With pre-qualification, your credit score is not impacted, and lenders can show you if you’re approved before applying.

Once you have a few pre-qualified lenders, you can choose which one works best for your situation. Only when you complete a full loan application will a lender perform a hard inquiry.

Reapply

After you have worked to improve your credit score, increase your income and reduce your debt level, you may consider reapplying for a personal loan.

It’s best to wait a few months before reapplying to ensure all of the changes to your credit profile have been reflected by all three credit bureaus. And lenders may want to see at least a few months of increased income to show that it is stable.

“It's a good idea to inquire with the lender about any waiting period requirements, such as waiting for 30, 60 or 90 days before reapplying,” said Muller.

Applying with multiple lenders

This may surprise you, but it is actually advantageous to apply with multiple lenders within a short time frame. This is because credit bureaus consider multiple credit inquiries for a similar type of loan a single hard inquiry. Credit bureaus know that consumers shop around to find the best lender, so they allow you to have multiple loan applications without counting each as a separate credit check.

While there is not a universal set time frame to have all the applications completed, most credit bureaus consider multiple loan applications within 14 to 45 days as a single credit inquiry.

What do you prioritize most?

FAQ

Can you apply for another loan after being declined?

Yes, you can apply for another loan after being denied, but you will most likely need to apply with another lender or add a co-signer or co-borrower if you’re applying with the same lender. If you plan on applying with the same lender yourself, it’s best to wait at least a few months before applying again.

How long does a declined loan stay on your credit file?

A hard inquiry on your credit file stays for two years, but the lender's decision to deny your loan is not recorded.

How much does loan rejection affect my credit score?

A loan rejection does not directly affect your credit score. Your score may dip as a result of the hard inquiry performed, but the loan rejection is not recorded in your credit profile.

Bottom line

If you’re denied a personal loan, don’t stress about it. You have plenty of options available to get the funding you need. Whether you add a co-signer or co-borrower to the loan, find another means of funding or improve your credit and apply again, there are several ways to get it done.

Shop around and apply with multiple lenders to get the best rates and terms. Just make sure you can afford the loan payments before applying for a personal loan, or it can hurt your credit in the long run.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Federal Deposit Insurance Corporation, “ Equal Credit Opportunity Act (ECOA) .” Accessed Aug. 20, 2023.
  2. Federal Trade Commission, “ Credit Discrimination .” Accessed Aug. 20, 2023.
  3. Consumer Financial Protection Bureau, “ How do I get a copy of my credit reports? ” Accessed Aug. 20, 2023.
  4. Equifax, “ Understanding Hard Inquiries on Your Credit Reports .” Accessed Aug. 29, 2023.
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