Borrowing, lending, and repayment are essential elements of our economic system. This is the very basis of our credit system. And there is a very strong likelihood that at some point in your life, you will seek a loan. Loans come in all shapes and sizes.
A majority of those heading off to college will require student loans to do so. Whether you’re taking out federal student loans or student loans from a private lender, your loan application must first be approved. The same is true for those buying or even leasing a car. Most buyers or lessees will require an auto loan.
Homebuyers will apply for mortgages; entrepreneurs will apply for small business loans; and borrowers of every kind may apply for personal loans for a number of reasons too infinite to list. In other words, loans can play a major role in your ability to access certain opportunities, investments, or claims of ownership.
So what do you do if your loan application is rejected? Well, you have a few options from active credit repair to alternative loans for those with less than ideal credit. But which is the right move for you?
Well, that depends on a lot of factors. So before we dig into the steps you must take in order to recover from having your loan denied, let’s get a better sense of the factors that can impact your loan eligibility.
If you already know that the best step forward is to improve your credit rating, we strongly advise checking out our tips on the best ways to raise your credit score. Otherwise, read on to learn more.
An Overview of Personal Loan Statistics
According to Bankrate, some 22 million American adults have some amount of debt related to personal loans. The lending service reports that “The national personal loan debt balance reached $222 billion in the last quarter of 2022 — a 32% increase from last year.”
This means that more than ever before, American consumers are relying on personal loans to make major purchases, invest in small business development, manage lingering debts, and much more.
But not all of those personal loans represent positive economic growth. For some, these personal loans may become an ongoing and compounding cause of financial hardship. According to Bankrate, the number of personal loan recipients with delinquent accounts increased by more than 4% over the course of 2022. This marked the highest level of growth in delinquencies since the aftermath of the Great Recession in 2011.
This underscores the importance of borrowing responsibly and meeting all of the financial obligations that come with that loan.
According to Bankrate, some 25% of American loan recipients will use these personal loans to make home improvements, which qualifies as an investment with growth potential. By contrast, some 21% of American loan recipients will take out a personal loan to handle medical bills. This, of course, represents a significant financial burden for many Americans.
And it also suggests that many Americans may find themselves in need of a personal loan for reasons that have nothing to do with financial responsibility. This is why it’s so important to take preemptive steps to protect your loan eligibility.
But what do you need to do in order to qualify for a personal loan?
Typical Personal Loan Requirements
Before you can complete a loan application, there are a few factors you’ll need to consider first. According to Forbes, there are a few basic requirements that you’ll need to be aware of before applying:
Credit score and history
When you apply for a personal loan, your lender’s requirements will typically include a full credit check. This “hard inquiry” will look at both your credit score and your credit history. This check is meant to ensure that you aren’t currently carrying any bad debts or delinquent accounts, as well as to identify any red flags in your credit history. Those flags may include delinquent or unpaid balances, accounts which have been sent to collections, and bankruptcies. These events may show up on your credit history for anywhere from 7 to 10 years depending on the nature of said events.
Credit scores range from 300 to 850, with the highest scores representing the best credit ratings. Many lenders will require a minimum credit score of 600 of any applicant. That said, there isn’t necessarily a specific threshold for loan eligibility. You may be able to receive a personal loan from certain lenders in spite of having a checkered credit history, a poor credit score or, even no credit history at all.
That said, your credit score and credit history will likely shape the terms of your loan. A higher score will usually give you access to a more favorable interest rate and less onerous origination fees. A lower score will significantly limit your options to lenders who are willing to avail personal loans with high interest rates on repayment.
Keep all of this in mind before you apply. It’s a good idea to know your credit score and identify any potential red flags in your credit history before you even get started. Confronting some of these issues in advance through credit repair or error dispute may reduce your chances of loan denial.
Income
It’s important for lenders to know that borrowers have the ability to make regular monthly payments on their loans. That’s why your loan application will include the requirement for proof of income. Some lenders will even have minimum income requirements, though you won’t likely ever know exactly what these requirements are.
According to Forbes, “Minimum income requirements vary by lender. For example, SoFi imposes a minimum salary requirement of $45,000 per year; Avant’s annual income minimum requirement is just $20,000. Don’t be surprised, however, if your lender doesn’t disclose minimum income requirements. Many don’t.”
While you may not be able to anticipate the exact income requirement held by your prospective lender, you can prepare the proper materials for presenting proof of income. Most personal loan lenders will accept current tax returns as well as pay stubs, signed letters from employers and bank statements illustrating monthly gross income.
Debt-to-income ratio
Your debt to income ratio, or DTI, is the balance between what you earn in monthly gross income and what you pay monthly in order to meet any existing debt obligations. This ratio is also considered an important indicator of your ability to repay any future loans.
Lenders will typically draw this information from your credit report, and can use it as a factor in considering the eligibility of your loan application. According to Forbes, the top threshold for DTI that most lenders will consider is around 36%. However, otherwise highly qualified borrowers–such as those with a sterling credit history and a higher than average income–may be able to qualify for a loan with a DTI as high as 50%.
Collateral
Most personal loans are unsecured loans, which means your borrowing power is based on your credit and payment history. However, with a secured loan, your borrowing power is based on what you can put up for collateral.
According to Forbes “If you’re applying for a secured personal loan, your lender will require you to pledge valuable assets—or collateral. In the case of loans for homes or vehicles, the collateral is typically related to the underlying purpose of the loan. However, secured personal loans can also be collateralized by other valuable assets, including cash accounts, investment accounts, real estate and collectibles like coins or precious metals.”
When you pledge collateral, it means you would have to surrender the collateralized item(s) to the lender if you fail to meet your repayment obligations. This type of loan obviously carries significant risk to the borrower. However, in exchange for this risk, you may be able to borrow a larger sum than might be possible with a traditional personal loan. In some cases, the interest rate on repayment may also be lower.
This is because your collateral reduces the risk of non-payment to the lender. This can create more latitude in the size and shape of your personal loan. That said, you should only consider a secured loan under certain specialized circumstances. If you do plan to do so, be prepared to collateralize an item of value as part of your loan application process and make sure you fully understand the implications of this risk.
Check out our article on secured loans and why you might actually be willing to take the risk to get one.
Documentation
Completing your loan application will typically require you to include a number of supplementary documents and materials. Be sure you have the following ready for submission:
- Proof of Identity (i.e. Driver’s license, Passport, Birth Certificate, Military ID, etc.)
- Verification of Income and Employment Status (i.e. Pay Stubs, Tax Returns, Bank Statements, Employer Contact Info., etc.)
- Proof of Residency (Copy of Rental Agreement/Mortgage, Utility Bill, Voter Registration, etc.)
Things That Can Get You Rejected for Personal Loans
Since the focus of our discussion is how to manage being rejected for a personal loan, let’s take just a moment to look at the factors that can result in your loan being denied.
- Poor Payment History: Having a credit history littered with late and missed payments, or accounts which have been sent to collections, can result in rejection.
- Alerts on Your Credit Report: Your credit report will show alerts for any accounts which are not currently in good standing as well as any debts that are in collections.
- A High Debt to Income (DTI) Ratio: In most cases, personal loan lenders will require you to demonstrate DTI that is around 36% or lower. Anything higher could result in having your loan application rejected.
- A Low Credit Score: Many lenders impose a minimum threshold of 600 for approving personal loans. That threshold will likely be even higher for the most favorable loan terms. This means that anything less than a very good to excellent credit score (740 to 850) could be a cause for rejection.
- Lack of Regular Income: As noted above, you will be required to prove a steady monthly income as part of your loan application process. If you don’t have, or can’t demonstrate, a steady income, this may be a reason for loan rejection.
- Excessive Credit Utilization: Using too high a percentage of your total available credit could result in a rejected loan (as well as a lower credit score). Credit experts generally suggest a credit utilization rate of less than 30%. If your credit utilization far exceeds this rate, this could also be a reason for loan application denial.
While there are a lot of factors to take into consideration when applying for a personal loan, there is some good news in all of this. According to credit bureau Experian, loan denial won’t hurt your credit score, at least not in the long run.
Experian explains that, “When you submit a credit application, the lender or creditor will generally run a hard inquiry on one or more credit reports, which will be notated on your reports. For most people, a hard inquiry knocks fewer than five points off their credit score, but that little dip will not last long—12 months at the most. If you’re denied, though, it doesn’t have an additional impact beyond the initial inquiry.”
That said, Experian also advises that you can take additional steps to avoid that hard inquiry, at least up front. This could be a good step for those who are unsure about whether or not they will qualify for a personal loan.
There are lenders who offer prequalification. This is an evaluation of your loan eligibility that is based on a “soft inquiry.” This will have no impact on your credit score, temporarily or otherwise. This is a risk-free way to find out how likely you are to qualify for a loan.
But again, as noted above, there are quite a few factors that can cause your loan application to be denied. So if that does happen, what steps can you take?
10 Things You Can Do When Your Loan Application is Rejected
1. Review Your Rejection Letter
Obviously, before you can address your loan denial, you need to know why it happened. There is a big difference between forgetting to include some necessary paperwork and applying with less than ideal credit, and therefore a big difference in the steps you’ll need to take.
First and foremost, get to the bottom of the reasons you’ve been rejected for a loan. According to Lending Club, “any lender who denies loan approval is required to send an adverse action notice, which lists the reason(s) your application was declined. If you were turned down because of something on your credit report, this notice will tell you what in your credit report led to the decline, and the name of the credit bureau that reported the information.”
Be sure you fully understand the reasons listed in your adverse action notice. If, for any reason, the explanation is unclear to you or is based on information that you believe to be incorrect, start by reaching out to the lender. Request an explanation for the adverse action notice and indicate your intention to dispute any inaccurate information.
In most cases, that dispute will be carried out with one or several credit bureaus. With that in mind…
2. Review Your Credit Report
When you are rejected for a personal loan, you will not only receive an adverse action, but you will also become automatically eligible to receive a free copy of your credit report. Be sure you take advantage of this eligibility. Your credit report will likely contain some of the key information pertaining to your loan denial.
Bankrate advises, “If you aren’t sure whether your credit score is in mint condition, the best thing you can do is review a copy of your credit report. You can request a free copy of your report from all three bureaus every 12 months by visiting AnnualCreditReport.com. Although this won’t show you your actual score, it will give you an idea of where you stand with creditors, as well as if there are mistakes that need to be corrected.”
Review your credit history thoroughly and be sure to dispute any debts that don’t look familiar, any red flags that you believe are erroneous, or any personal information that might be incorrect. Taking this step may even yield evidence of identity theft or stolen credit card information, which would most certainly be damaging your credit rating and reducing your eligibility for a personal loan through no fault of your own.
If you are rejected for a personal loan, start with a comprehensive review of your own credit. Make sure everything is right (and correct anything that isn’t) before taking the next step.
3. Build Your Credit Score
Once you’ve reviewed your credit report for accuracy, it’s time to address your credit score. As noted above, a credit score below 600 is likely to result in a rejection from many major lenders. If your credit score falls below this range, you’ll want to set your sights on credit repair.
But bear in mind that this is a step that may require a fair amount of time and patience. If there are negative reports dragging down your credit score, it could take years of making regular, on time monthly payments before these marks no longer impact your rating. Likewise, it can take years to pay down debts that may be impeding your progress.
There are, however, a few steps you can take to accelerate the process including reducing your credit utilization rate by requesting higher credit limits from your credit card issuers, paying down some of your credit card debts more aggressively, or transferring and consolidating multiple balances into a single, low-interest account. All of these steps can help to improve your credit score in relatively short order, though your ability to take these steps will of course depend on your financial flexibility.
For a deeper look at the steps you can take to improve your credit score in both the short and long term, check out our comprehensive look at the path to credit repair.
4. Get a Secured Credit Card
Nerdwallet suggests that one good way to begin rebuilding your credit on the way to a personal loan is to try getting a secured credit card. This is an especially good option if the reason you don’t qualify for a personal loan is because you have limited credit history or no credit history at all.
Secured credit cards offer a pathway to building credit for those whose borrowing power is stifled by their limited credit history. According to Nerdwallet, “Secured credit cards require a cash deposit that’s usually equal to the credit line. The card issuer holds the deposit in case you don’t pay your bill. These cards allow you to make credit card purchases and get payments reported to the credit bureaus.”
So while your secured credit card functions a bit like a debit account, using your card and paying your bills on time can pave the way toward greater borrowing power. This is often a great option for college students who are just getting started on building their credit.
5. Pay off Your Debts
As noted earlier, carrying excessive debt can damage your loan eligibility on multiple levels. First, if your debt obligations result in a debt to income ratio that is greater than 50%, this will significantly limit your borrowing power. Additionally, if this debt raises your credit utilization significantly beyond the 30% threshold, this can also limit or derail your personal loan eligibility.
If you are carrying a high credit card debt burden, or managing a large sum of debt for personal loans such as auto loans or student loans, you can improve your chances of loan approval by more aggressively paying these debts down.
There are a number of strategies that you can use to begin carving away at your debts, but the best one for you will depend on a combination of debt obligations, your credit mix, your interest rates and your financial flexibility. To find the best debt repayment strategy for your situation, we recommend checking out our article on how to pay off our credit card debt.
6. Find Ways to Raise Your Income
As we’ve noted, debt to income ratio is a major factor in shaping your credit rating as well as determining your eligibility for a personal loan. As Experian explains, if your DTI “is too high, lenders could view you as unable to afford an additional loan payment. To improve your chances of getting approved the next time you apply, work on paying down some of your debts—or increasing your income.”
While it could take a long time to pay down your debts, you could see a much faster turnaround in this DTI by simply finding ways to raise your income. Sure, that’s much easier said than done. But you do have a few options to consider. The quickest way to see downward movement in that DTI is to ask your current employer for a raise.
Obviously, the likelihood of receiving an affirmative answer may vary widely from one working situation to another, so we’ll leave it up to you to make that call. But you could also consider initiating a search for a new job with higher pay.
If you’d rather keep your current job, and a pay raise isn’t in the cards, it may be time to consider a side hustle. While this means more work, it may also mean a much faster avenue to improving your DTI. And of course, you should also use that improved income to pay down your debts faster. Both actions will result in a far greater chance of personal loan approval.
Thinking of getting yourself a side hustle? Here are a few tips to help get you started.
7. Compare Other Personal Loans
Of course, if you are rejected for a personal loan, you don’t necessarily have to take no for an answer. If you believe you still have a chance to qualify for a loan based on some of the factors we’ve discussed here, you certainly reserve the right to shop around.
The truth is that all lenders are different. While there are certain basic thresholds that lenders tend to use when evaluating your loan eligibility, none of these figures are actually set in stone. While you may fall outside of eligibility for one lender because of a credit score in the mid-600s, you may just qualify for a loan with another lender.
Bankrate advises, “Various lenders have different requirements, rates, terms and fees. Research lenders and compare rates before applying to one in particular. The lender that will work best for you depends on your specific financial situation and needs….You can get a personal loan from online lenders, banks and credit unions. Each option caters to people with different incomes, credit scores and personal life schedules.”
8. Try Prequalifying for a Loan
Bankrate also notes that “Prequalifying with a few lenders is a good idea to see exactly what you will be eligible for before applying. This is an especially good idea if you’ve already been rejected for a personal loan in the past.
If you’ve taken steps, in light of your loan rejection, to pay down your debts, raise your income, or otherwise repair your credit rating, prequalification can be a great way to see how far you’ve come.
And as previously noted, the prequalificationl process will only yield a soft inquiry into your credit report, which will not have a negative impact on your credit score. This makes it a risk free way to shop around for the loan that offers you both the greatest odds of approval and the best repayment terms.
9. Choose a Lender Specializing in Bad Credit Loans
While many of the strategies suggested here above will require you to take aggressive steps to improve your financial standing, we also recognize that this is not always possible. In some instances, a personal loan may be required in order to help you navigate existing financial hardship. And it may be required fast.
For instance, as we noted above, an extremely high percentage of personal loans (21%) are given to those grappling with medical bills. Waiting for your negative marks on your credit report to go away may simply not be an option.
If this describes your situation, you may need to choose a lender that works with less than ideal borrowing profiles. Experian notes that “Some lenders specialize in working with borrowers with bad credit and have less stringent credit requirements. The catch is that your interest rate will generally be higher than what you’d qualify for with fair, good or excellent credit.”
For this reason, it is advised that you borrow with caution. As a borrower with less than ideal credit, you are vulnerable to onerous loan repayment conditions. Taking on a personal loan with an exceedingly high interest rate or unfair hidden fees could ultimately compound your financial difficulties. That said, there are some options for those who have been denied personal loans with more favorable repayment terms.
10. Add a Cosigner
If you can’t beef up your borrowing power on your own, or you simply can’t afford to wait for your credit to rise to the ideal score, there is one more option. You could find a cosigner–an individual with a strong credit history and credit rating who is willing to cosign on your loan.
According to Nerdwallet, “If you don’t meet a lender’s credit score requirements, consider adding a co-signer with good credit to your application. This can help you qualify and get you a lower rate.”
But of course, this is a recommendation that comes with a pretty big catch. You are basically betting your cosigner’s credit rating on your ability to meet your loan repayment obligations. If you fall short of meeting those obligations, it can damage your cosigner’s personal financial standing.
So if there is a trusted person in your life who is willing to cosign on a personal loan, be sure that you are prepared to repay their support with responsible management of your debts. Otherwise, you could lose a whole lot more than just a few points on your credit score.
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And for an even more comprehensive look at personal loans and how they work, check out our complete guide to personal loans.