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.

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.

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:

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. 

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 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.

There can also be other reasons why your loan application was denied, such as:

You can improve your odds of getting your loan application approved with the following:

If you’ve been denied a personal loan due to bad credit, you might be able to work around it.

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.

You can start with a few steps to improve your credit.

1. Order a free copy of your credit report: Each of the three credit rating agencies offer a free copy of your report once a year at AnnualCreditReport.com. Dispute any errors on your application, and take note of correct information that might be dragging your score down, such as accounts in collection or a history of late payments.
2. Ensure your payments are on time: You can enroll in automated electronic payments or set recurring reminders for yourself.
3. Start paying down your revolving credit balances: If possible, aim to use less than 30% of your available credit and pay your credit card balance in full every month.
4. Only apply for credit when you really need it, and avoid opening any unnecessary accounts: Applying for a new loan or line of credit results in a hard inquiry on your credit report, which can cause a small drop in your credit score.
5. Become an authorized user: If you have someone close to you with good credit, consider asking them to add you as an authorized user on the account. They don’t have to give you a card to use, but the payment history on that card will help strengthen your credit profile.

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.