Why You Keep Getting Declined When You Need a Loan

Whether you’ve been rejected in love – or loans – you’re in good company. Speaking from personal experience, it’s not fun, but people face rejection every day. 

If you want to show rejection that it’s not the boss of you, we’ve got a pro tip: dust yourself off and try again! 

Don’t be discouraged. Getting denied for a personal loan doesn’t mean you’ll never qualify for one. It just means that you may need to look at other loan options, or you’ll need to improve your finances. 

Let’s take a look at the reasons why you may have been denied. Then we’ll get to the good stuff: exploring ways to improve your chances of getting approved before you apply again.

Why Do I Keep Getting Denied for Loans?

If you keep getting denied for a personal loan, the first step is to figure out why your application keeps getting rejected.

Maybe there were errors on your application or credit report. Maybe you’re not as financially “healthy” as thought you were. Either way, there are steps you can take to reduce or eliminate these problems. 

First, you’ll need to know what’s wrong. And, fortunately, lenders must disclose why they declined a personal loan application, so they’ll give you the answer. Your job is to pay attention to what they tell you. 

Let’s explore the most common reasons why loan applications are rejected.

Your credit score is too low

Low credit scores are the number one reason why personal loan applications get denied. Your credit score is a three-digit number that measures your creditworthiness (think: your reliability paying back debt). 

The higher that three-digit number is, the more a lender will trust that you’re really good at repaying the money you borrow. So, it’s natural that lenders would prefer to lend money to people who have a history of paying their bills in full and on time. 

You can use FICO® Scores^[1] as your gauge to understand where your credit score falls. 

• Excellent: 800 – 850
• Very good: 740 – 799
• Good: 670 – 739
• Fair: 580 – 669
• Bad: 300 – 579

You can check your credit score on your credit card, bank or loan statements. To better understand your credit history and look for errors on your report, visit AnnualCreditReport.com. 

There are a few credit hiccups that can negatively impact your credit score, including:

• Late payments
• Inconsistent payments
• Recent credit inquiries 
• Maxing out your credit limit

Your debt-to-income ratio is too high

Your debt-to-income (DTI) ratio measures your gross monthly income against your recurring monthly debt payments. You may have been denied a personal loan because your DTI was too high. The lower your DTI, the better. While the maximum DTI a lender accepts will vary, most lenders prefer a DTI of 36% or less. 

Debt can include any of the following:

• Rent 
• Mortgage loans
• Small business loans
• Student loans
• Personal loans
• Credit cards
• Car loans
• Child support or alimony 
• Homeowners insurance
• Property taxes

To calculate your DTI, add up your monthly debts and divide them by your gross monthly income (think: the money you make before taxes and deductions). Multiply your result by 100, and you’ll get a percentage. 

Not a math person? Honestly, same. Feel free to use our DTI calculator. Put away your calculator and plug in your debts and income. 

Unstable job history

Lenders do look at job history when they’re approving borrowers for personal loans. They’re not interested in job titles; they’re looking for consistent employment. Lenders want to know that your income is stable. A stable, qualifying income is a signal to the lender that you can afford the loan and pay it back on time. 

Multiple job changes are red flags for lenders because their job is to make sure that your income is stable and consistent. 

Freelancers, seasonal employees and self-employed workers can get approved for personal loans, but lenders may request additional paperwork to get a fuller picture of their income history. If you’re self-employed, your loan may have been denied because you fall into one of these categories and weren’t able to demonstrate a consistent income stream(s).

Insufficient income

Lenders also look for proof of income to verify that the borrower makes enough to repay the loan and any other bills they have. Proof of income might include pay stubs or W-2s. 

If your personal loan was denied, it may be because the lender didn’t think you made enough money to handle all your bills and a loan. You may have a stable job but might not make enough money for the lender to justify the size of the loan. Consider asking for a smaller loan that matches your income.

Information missing on the application

Personal loan applications require several forms and types of documentation. You may have been denied a loan because there was missing information on your application or you incorrectly submitted your government-issued ID or bank statements. Missing paperwork practically guarantees loan denial. 

Missing or incorrectly submitted information isn’t a reflection of your financial health. They’re technicalities and there’s usually an easy fix. 

Double-check that you’re filling out your application correctly and submitting all required documents. There are three types of documentation lenders will request:

• Proof of identity: Normally, you’ll submit two proofs of identity. You can submit a driver’s license, passport, state-issued ID, birth certificate, Social Security card, military ID or a certificate of citizenship. 
• Proof of income: Your proof of income must confirm that you have the cash flow to afford a personal loan. Your proof can include pay stubs, tax returns, W-2s or 1099s.
• Proof of address: You must submit proof of address to show the lender your living situation is stable. Lenders will generally accept recent utility bills, lease agreements, mortgage statements, credit card statements or property tax bills. 

What Should I Do After Getting Rejected for a Loan?

STOP.

If you’ve been rejected for a personal loan, pause, step back and reevaluate your financial situation. Reapplying without taking steps to fix anything can damage your credit score. 

Lenders are required to disclose why they declined your application. If the problem came down to your financial health, there are things you can do to get your finances healthier.

Improve your credit score

If your personal loan application is denied, building or repairing your credit score will help your chances. First things first, check your credit report to make sure there are no errors. If there are errors, you can file a dispute with the credit bureau.

If your credit report is error-free, but your score is on the lower side, there are a few methods you can try to boost your credit score. 

• Request a higher limit on your credit card(s) then avoid using the card or charge a small amount and pay it off in full each month
• Get a secured credit card to build or reestablish your credit 
• Pay down any outstanding credit card debt
• Set up automatic payments so you establish a track record of paying your bills on time

Credit scores generally take around 3 months to bounce back or rebuild – so don’t expect results overnight. Try a few of these methods, and you’ll be on your way to a higher credit score. 

Increase your income and pay down debt

The only way to decrease your DTI is to make more money or pay off debt. And trust us, we know this advice is easier printed than done. From our rollercoaster economy to rising prices at the, well, everywhere, most of us are doing everything we can to pay off debts and we aren’t always in a position to increase our income. 

But that doesn’t mean you shouldn’t take the time to look at your finances and see if there are debts you could be paying off more strategically. Let’s look at two popular debt repayment strategies: the snowball method and the avalanche method.

The snowball method 

With the snowball method, you pay off your smallest debt first, then you wrap the money you were using to pay off the first debt into your payments for the next smallest debt. The money continues to ‘snowball’ as you move from smaller to bigger debts. 

The avalanche method 

The avalanche method focuses on paying off debt with the highest interest rate first, then you wrap the money you were using to pay off the first debt into your payments for the next highest interest rate debt. Because this method prioritizes the debts that cost you the most in interest, you’re saving money by paying your higher interest debt off first.  

Apply for a smaller loan amount

Another option is to reevaluate your financial situation and decide if you really need the amount of money you applied for. Could you make it work with a smaller loan? 

Consider requesting a realistic loan amount that improves your chances of getting approved. The smaller the loan amount, the more likely it is the lender that will approve it – especially if you have a high DTI. No lender wants to add debt to a debt-heavy situation. 

Find a co-signer

If you have a low credit score or no credit history and building your credit score isn’t an option, consider finding someone who will co-sign a personal loan with you.

Applying for a loan with someone who has good credit comes with many perks. It can increase your chances of getting approved for a loan, and in some cases, you might score better loan terms than you would have gotten on your own.

Warning: co-signing comes with some risks. If you can’t repay the loan, your co-signer is legally obligated to pay it back. Even if you file for bankruptcy, the lender can go after your co-signer for payment. 

As long as you and the co-signer are well aware of the risks, this may be the way to go.

Find a different lender

Not all lenders have the same criteria or requirements when it comes to personal loans. When you’re applying for loans, shop around and compare different lenders. 

Look for a lender that can meet your needs. If you know your credit score and DTI and you’ve taken an honest assessment of your financial situation, you can use that info to see how you stack up against a lender’s requirements. 

How Long Should I Wait After Being Rejected for a Loan?

There’s no standard amount of time to wait before applying again. What’s important is making sure that you understand why you were rejected, and you explore all your options to improve your financial situation before reapplying. 

Every time you apply for a loan, your lender performs what’s known as a hard credit check. Multiple hard credit checks can cause your credit score to drop so don’t put yourself in that position. Prioritize rebuilding your credit and applying for a loan when your score is healthier. Remember, this usually takes about 3 months. 

Can I Get a Loan With Bad Credit?

The short answer is yes. You can get approved for a personal loan with a low credit score, however, the lender will likely charge a higher interest rate on the loan. In fact, borrowers with bad credit are generally offered higher interest rates on loans. 

Some lenders specialize in loans for borrowers with low credit scores. And there are even lenders who don’t require credit checks. The easiest loans to get approved for are short-term cash solutions for borrowers with bad credit scores who need fast cash. 

Here are a few options if you’re working with a low credit score:

• Search online for “bad credit loans”
• Try applying with a credit union rather than a traditional bank
• Get a cash advance
• Ask family or friends for a loan

If at First You Don’t Succeed …

Try again – but only after you’ve figured out what went wrong the first time, and you’ve fixed it. 

Be strategic. Evaluate your overall financial health and improve your financial situation before reapplying. Position yourself to be a stronger candidate. It will help your chances of getting approved.