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

  • Your personal loan application could be denied for many reasons, including low credit score, poor debt-to-income ratio or an incomplete application.
  • The Equal Credit Opportunity Act requires lenders to disclose why your loan was denied.
  • You can improve your chances of approval in the future by paying down debt, increasing income, lowering the requested loan amount and boosting your credit score.
  • Alternatives to personal loans include a family loan, grants and scholarships and secured credit cards.
  • Compare rates and get a personalized quote based on your credit score with a banking app like MoneyLion.

What happens when you need a loan and you have been refused everywhere? Being declined can feel like the end of the world, but don’t panic just yet. There are steps you can take to better understand why you were denied and put yourself in a better position to score those extra funds when you’re ready to reapply.

Here’s a look at everything from why loans are denied to why you should prequalify, plus some suggestions for loan alternatives, just in case.

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.

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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:

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:

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.

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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.

FAQ: What to do if you’re denied a loan

Why does a personal loan get rejected?

Your application may be denied due to bad credit, unstable work history, incomplete information or a high income-to-debt ratio. You may also be denied if you’re seeking a loan for a specific purpose, like home renovation, but the lender suspects you don’t plan on actually using the borrowed money for that purpose.

How can I avoid being rejected for a personal loan?

The best way to increase your chances of being approved for a personal loan is to ensure you line up with the lender’s requirements. Double-check your application is complete, know your credit score going in and include information that paints you as a good risk.

How long should you wait to apply again after your loan application was declined?

You should wait at least 30 days after a loan denial to apply again, but waiting at least six months gives you the best chance of fixing any issues cited as part of your first denial and increasing your chances of approval the second time around.

About the Author

Alana Luna (Musselman)
Alana Luna (Musselman) Writer & Content Strategist

Alana Luna (Musselman) is a versatile storyteller with over a decade of writing experience. She is passionate about helping people build their business through unique and engaging content.

Some examples of her current freelance projects include building content strategies for small businesses, completing industry research to build case studies, crafting buyer guides and more.

She has a passion and keen ability to simplify complex ideas through storytelling to make it easier for readers to understand hard-to-digest information. To accomplish this, Alana’s writing holds strong three principles – content that educates, engages and entertains.

About the Reviewer

Blake Esken
Blake Esken Los Angeles Times

Blake Esken has over 15 years of experience in product management and has been a member of the Los Angeles Times staff for over five years.

As part of his role at the Los Angeles Times Commerce Team, Blake acts as the in-house reviewer and fact checker for LA Times Compare. He supervises all content for compliance and accuracy and puts to use skills he has honed through years of experience managing high-stakes projects for a range of industry-leading companies.

He has a strong background in data analysis, compliance, and communication, which allows him to support LA Times Compare through fact-checking in an effort to provide up-to-date and factual information across our content.

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