Content provided by Credible. Credible is solely responsible for this content and the services it provides. New York Post receives a fee if you click a link below and close a loan through Credible. WHY TRUST CREDIBLE: Our goal is to give you the tools and confidence you need to improve your finances. We do that by creating expert-curated and deeply-researched articles that adhere to our editorial guidelines. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS #1681276, is referred to here as "Credible."If you’ve applied for a personal loan but you were denied, don’t get discouraged.
There are a few things you can do to understand why the lender denied your application and what you can do in the future to improve your odds of approval, such as paying down small debts or improving your credit score.
Understand why your loan application was denied
When your loan application is denied, lenders must disclose why, according to the Equal Credit Opportunity Act. You have 60 days to request this information if they don’t provide specific reasons.
Common factors that lead to a loan application denial are poor credit, lack of credit history, insufficient income, a high debt-to-income ratio, lack of sufficient collateral, and derogatory marks on your credit, such as bankruptcies, foreclosures, collections, charge-offs, etc.
Addressing the factors that caused your loan application denial can improve your chances of securing a loan.
Poor credit
Loan lenders use credit scores to determine the likelihood that a potential borrower will repay their loan. People with poor credit are perceived as high-risk, meaning lenders often hesitate to approve their loan applications.
Poor credit can be caused by:
- Low credit score: Most credit scores range from 300 to 850. A “poor” credit score is anything under 580.
- Late payments: Your payment history accounts for 35% of your credit score, so paying your bills late can lead to a low credit score.
- Credit use: Credit use is how much you owe on a credit card versus your limit. The closer you are to that limit, the higher your credit use, which can lower your score.
- Derogatory marks: Negative items on your credit report can impact your overall score and stay on your report for years after. Derogatory marks include missed payments, account charge-offs, repossession, collections, bankruptcy, and foreclosure.
- Lack of credit history: Your credit history represents your experience as a borrower. When a lender sees that you don’t have much of a credit history, they might not have confidence in your experience borrowing funds and could deny your application for a credit card or loan.
- Credit report errors: Errors on your credit report — such as accounts that belong to someone else or accounts incorrectly reported as delinquent — can bring down your score.
Insufficient income
Lenders consider your income when determining your eligibility for a loan because they want to make sure you can afford the payments. Some lenders have minimum income requirements to ensure borrowers have a stable source of funds to support repayment.
High debt-to-income ratio (DTI)
Even if you have a high enough income to qualify for a loan, your application could still be denied due to a high debt-to-income ratio (DTI). You calculate your DTI by dividing your total monthly debt payments by your gross monthly income. If your DTI is too high, this can indicate that too much of your income is going toward debt payments, which poses a higher risk for the lender.
Most lenders prefer to work with borrowers with a DTI below 35%, though some may accept a higher ratio.
Credit report errors
Credit report errors can happen when a lender or creditor makes an error while reporting data to the nationwide credit bureaus: Equifax, TransUnion, and Experian. Errors can also occur as a result of two people having similar personal data such as the same name, similar Social Security numbers, same birthday, or similar addresses.
An example of a credit report error is a duplicated account where one of your accounts is listed twice. If you owe money on that account or missed a payment, your report will reflect that and show double the debt or late payments, which can lower your credit score considerably.
Fortunately, you can dispute the error to have it removed from your credit report and potentially improve your credit score.
Other reasons for denial
There can also be other reasons why your loan application was denied, such as:
- Unstable employment history
- Not meeting other lender criteria
- Missing information on your loan application
Improve your odds of approval
You can improve your odds of getting your loan application approved with the following:
- Pay down debt: Lowering your debt-to-income ratio demonstrates improved financial stability and ability to handle additional loan obligations.
- Improve your credit score: Pay your bills on time, avoid collections, and keep credit card balances low. Over time, these habits can positively impact your credit score.
- Dispute credit report errors: Regularly review your credit reports from all three major credit bureaus. If you identify any errors, dispute them with the credit bureau and creditor.
- Request a smaller loan amount: By requesting a smaller loan, you decrease the lender’s perceived risk and increase the likelihood of approval.
- Increase your income: If your income was a factor in the loan denial, explore opportunities to increase your earnings. This might involve seeking a higher-paying job, taking on additional part-time work, or pursuing freelance or side projects.
How to get a personal loan for bad credit
If you’ve been denied a personal loan due to bad credit, you might be able to work around it.
- Find a cosigner for the loan: Some lenders may approve your loan application if you get a cosigner. A cosigner agrees to take over payments on your loan if you cannot make them.
- Use collateral: Collateral is an asset used to secure a loan. If you default on the loan, the lender can take the asset and sell it to cover your loan balance. Collateral can be your car, house, or other investments.
- Find a bad-credit lender: Some lenders specialize in working with people who have bad credit. However, remember that they tend to charge higher interest rates and fees to offset the risk of making loans to people with lower credit.
Where to get a personal loan if your application was denied
Some lenders are more likely to approve you than others, including online lenders with lower credit score requirements. Credit unions are another good option, as they often consider factors beyond credit scores and offer competitive interest rates and lower fees when compared to other lenders.
Research and compare online lenders to help find the best terms and conditions for your situation. Try prequalifying with a few lenders to see if you meet the initial requirements.
How to improve your credit
You can start with a few steps to improve your credit.
Personal loan alternatives
If you can’t wait for your credit to improve gradually over time and aren’t getting any results with other lenders, consider these other options.
- Home equity loan: If you own a home with considerable equity, you may have an easier time getting approved for a home equity loan or line of credit, as it will be secured by your home’s equity.
- Credit card: You might be able to get a cash advance from your credit card, but it will probably come with a very high interest rate.
- Cash balance life insurance: If you own a life insurance policy with a cash value, consider tapping that cash value.
- Retirement funds: Some 401(k) plans allow participant loans.
- Cash-out refinance: If you own a home, you may be able to do a cash-out refinance. This type of refinancing is where you take out a new loan with a higher balance than your existing loan and take the difference in cash.
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