Can’t Get a Loan? What to Do if Your Application is Declined

Reasons your loan was denied

If you’ve been denied a loan, the first thing you need to do is determine why you were denied. Once you understand the causes, you can work on a solution.

You have a bad credit history

Your credit score puts a number value on your debt and payment history. You may have a low credit score if you have little credit history (you haven’t borrowed and paid back money) or if you borrowed money and didn’t honor the agreement or defaulted on repayment.

You have a high DTI

Your debt-to-income (DTI) ratio shows how much money you have coming in versus how much of those funds is already earmarked to pay off debts, including student loans, auto loans and credit card bills.

Experts consider any DTI ratio over 50% to be an indication that the applicant may be overextended, though some lenders look for an ideal debt-to-income ratio of 36% or less. If your debt-to-income ratio is higher than 50%, it’s best to reduce what you owe before applying for another loan.

You have an unsteady employment history

People who are employed are better positioned to pay back the money they borrow. An applicant with large gaps in their work history or who changes careers frequently may be a greater risk because they seem unreliable and/or unpredictable.

You don’t have a steady income

Any indication of unsteady income, due to lack of work or even contract/gig work, could raise a red flag. That doesn’t automatically disqualify you from taking out a loan, but it could make it more difficult to be approved. Having tax records that show income over a year’s span versus over just a few months or pay periods could improve your case.

Your loan doesn’t fit the purpose

Secured loans, unsecured loans, debt consolidation loans, college loans—these are just a few types of personal loans, and they all come with specific guidelines attached. If you apply for a loan and the plan you have for the money doesn’t align with the rules laid out by the lender, you could be rejected.

Your application is incomplete

An incomplete application is automatic grounds for rejection. Triple-check that your application is complete and all required documentation is attached before you submit.

What to do if your loan is denied

Before you assume your loan is shelved for good, see if there’s a way to fix underlying issues and get your application back on track.

Identify why your loan was denied

The Equal Credit Opportunity Act (ECOA) says that lenders must tell you why your loan was denied, as long as you inquire about the denial within 60 days of being notified of your potential lender’s decision. You can then use that information to tackle whatever’s preventing you from being approved.

Review your credit report

If the lender denied your application because of your credit score, it’s time to review your credit report. You’re entitled to a free credit report from each of the three major credit bureaus once a year, which you can get through AnnualCreditReport.com. Pore over the report to make sure everything listed is correct.

Boost your credit score

You typically need a score of 600 or above to qualify for a loan. You can boost your score by paying down some of your debts reported to the main credit bureaus. If there are debts or missed payments you believe are listed in error, contest them in writing. You may be able to get them removed.

Other ways to build or boost your credit score include:

• Make all your debt payments on time.
• Keep your credit card balances low.
• Ask lenders to raise your credit limit, which will help improve your debt-to-income ratio.

Pay down your debts

Repay your debts and you can improve both your credit score and your chances of being approved for new loans. Try to cut back on expenses, perhaps by cutting a streaming service or packing your lunch instead of buying it at a local deli, and funnel that money to your debtors instead.

Look for ways to increase your income

There are only so many expenses you can cut, so try tackling the problem from another angle by boosting your income.

You could consider:

• Asking for more hours at work.
• Scheduling a meeting with your boss and make the case for a raise.
• Taking up a side hustle, like walking dogs or becoming a food delivery driver.

Shop around and compare personal loans

Just because you were rejected by one lender doesn’t mean you’ll be rejected by all lenders. If you’ve had your loan denied, make sure you’re applying for the right type of loan. You can also shop around and compare loans from different banks and credit unions. You may be approved for a different loan term or a loan with lower monthly payments.

Prepare for your next application and prequalify

When you prequalify for a loan, you’re asking whether you’re likely to be approved if you officially apply. It’s like a trial run where the bank sees whether you meet basic requirements without running your credit score or asking you to fully commit. This could help you identify stumbling blocks on your application so you can fix them before officially moving forward.

Apply for a smaller loan amount

If you’re denied based on monthly income or DTI, you may get approved for a smaller loan that saddles the lender with less risk.

Find a co-signer

A co-signer is someone who is in a sound financial situation and is willing to serve as backup for your personal loan. They agree to make the payments if you don’t, helping you secure the funds you need without waiting until your own financial situation improves.

When to apply for a loan again after getting rejected

You should wait at least 30 days after being denied a loan to reapply, but waiting at least six months increases the chances you’ll improve your financial standing enough to gain an approval. Use that time to work on the big picture, perhaps by paying down debt and increasing income.

What happens if my loan is denied a second time?

The process after a second denial is the same as after the first. Ask for the reason behind the denial, review your credit score and take steps to fix the listed problems before applying again.

Alternative financing methods to consider

If you find yourself telling pals, “I need a loan but keep getting declined,” it may be time to consider some alternative financing methods.

• Secured credit cards: With a secured credit card, you pay a deposit that becomes your credit limit. This doesn’t help immediately if you’re short on funds, but it can help you build credit and improve your credit score so you can get a personal loan in the future.
• Grants or scholarships: If you need money for your business, look into local or federal small business grants. If you need money for school, research scholarships from public and private organizations.
• Family loans: Ask a financially secure family member if you can borrow the money you need, but keep the agreement as professional as possible. Discuss terms and sign a contract that outlines interest rates, a repayment schedule and what happens if you default.
• Hardship loans: If you’re facing financial difficulties or unexpected circumstances and have been denied traditional loans, hardship loans could be a viable option. These loans offer more flexible terms and conditions tailored to your current financial situation.
• Cash advance apps: Cash advance apps allow you to borrow a small amount of money against your next paycheck. These cash advance apps often have fewer requirements than traditional loans, making them an accessible option if you need funds quickly. However, be aware of fees and repayment terms associated with these apps.
• No-credit-check loans: If your credit history is a barrier, consider exploring no-credit-check loans. These loans typically do not rely on your credit score for approval. They focus on other factors like your income and employment history.