skip to main content

What To Do if You’re Denied a Personal Loan

Written by
Brian Flaherty
Brian Flaherty is a financial writer who covers personal finance, investment analysis, and the global economy.
Read time: 6 min
Updated on December 28, 2023
woman holding her hands up asking can you finance a phone with bad credit?
Being denied a loan can be frustrating, especially if you were planning on using the funds to help accomplish a meaningful goal.

However, you don’t have to permanently derail your plans. When you’re denied a loan, the lender is required to inform you of the cause of denial through an Adverse Action letter. If you address the underlying reason for rejection, a subsequent loan application may have a better chance of being approved.

Some of the most common loan denial reasons include:

Inaccurate application

It’s possible the application you submitted contained outdated documents or basic factual errors.

Low credit score

Lenders often have a minimum credit score requirement. If you don’t make this cutoff, your application will likely be rejected.

High debt-to-income ratio

Your debt-to-income ratio (or DTI) measures the percentage of your monthly income that goes towards your debt payments each month. For instance, if you have a $2,000 mortgage payment, a $500 car loan payment, and earn $6,000 a month, your DTI is about 42%.

Lenders may reject you for having a high DTI, as it indicates limited availability of income for additional debt obligations. Generally, a DTI less than 35% is considered good.

Not enough credit history

This can be one of the most frustrating reasons to be denied a loan, especially if you’re early in your career and trying to make a big purchase. But with a limited credit history, it can be difficult for lenders to assess your risk.

High credit utilization ratio

If you’re consistently spending a high percentage of your limit on credit cards, you’ll likely have a high credit utilization ratio.

Lenders view a high credit utilization ratio as a sign of financial stress. Generally, a ratio of less than 30% is considered good.

Too many recent credit inquiries

If lenders see that you’re desperately searching for new credit, they might be concerned that you’re taking on too many debt obligations and deny your application.

Unstable employment

Lenders prefer a stable, steady income to accurately determine your ability to manage your monthly debt payment. Lenders may reject you if you’re hopping between jobs or have a limited employment history.

What to do before reapplying

There’s no surefire way to be certain that a loan application will be approved. However,  addressing the reason (or reasons) for your rejection and improving your overall financial picture can increase your chances of being more successful on a subsequent application.

Here are some tips to remember as you prepare a second application, including how they relate to the loan rejection reasons described above.

Ensure your application is filled out accurately

Having incomplete or incorrect paperwork might cause your application to be rejected.   Double-check that all documents are filled out with accurate information.

Increase your income

Of course, increasing your income might be a challenge  – but doing so will help lower your DTI ratio, making lenders more likely to believe you can cover new debt obligations.

Having a higher income will also make it easier to cover existing debt payments, which will help you address our next tip.

Improve your credit score

Improving your credit score can be a nuanced topic, so it’s ideal to explore additional resources for a thorough understanding. In general, make sure you’re paying existing obligations on time, that your credit utilization isn’t excessive, and you have a healthy mix of credit available.

Lower your credit utilization

Reducing the amount that you rely on credit cards may improve your credit utilization ratio which not only helps your credit score but could be the deciding factor in getting a loan application approved on its own.

Some people find that switching to cash or debit cards for most purchases is an easy way to avoid overusing their credit cards.  Alternatively asking for a higher credit limit on your card may be beneficial.

Request a lower loan amount

Lenders consider loans for a substantial amount of money as riskier. By requesting a lower loan amount in your next application, they might be more willing to approve your application, even if your financial situation hasn’t changed significantly.

How long should I wait before filing another loan application?

Waiting might be the most difficult tip to follow on this list. However,  taking some time before submitting another application could benefit you in numerous ways, such as:

  • Letting you establish a longer, more stable employment history
  • Extending your credit history
  • Reducing the significance of recent credit inquiries

Now, if you’ve decided to wait before submitting another application, the question becomes: how long?

There’s no hard-and-fast rule when it comes to determining the amount of time you need to wait before filing another loan application. Every situation is unique.

It is advisable to wait at least a minimum of one month before applying for a new loan. Credit histories are typically updated once a month, and any improvements you’ve made won’t be reflected before the next update occurs.

However, to be safe and ensure the best possible outcome, it may be wise to wait four to six months before applying for another loan. While this extended waiting period might be frustrating, it could mean avoiding multiple hard credit checks within a short time, along with other reasons explained in more detail below.

Why you shouldn’t apply too early

The main reason you should avoid applying for another loan too soon is that most requests for credit result in a hard inquiry on your credit score.

A hard inquiry means a lender has requested a copy of your credit report to consider you for a loan.  Frequent credit requests will lead to multiple hard inquiries on your credit report, which may affect the success of your loan application in several ways.

Hard inquiries lower your credit score

Individually, hard inquiries have a  slight impact on your credit score, generally reducing it by about five points. However, if you start racking up several hard inquiries, these small impacts can start adding up.

Hard inquiries don’t last forever and generally affect your credit score for about a year and drop off your report entirely after two years. Note that multiple requests in a short time frame for some loans like auto loans or mortgages might be grouped as one hard inquiry. However, that exception doesn’t apply to things like personal loans or credit cards.

Frequent applications indicate financial distress

If you have a strong financial picture with plenty of cash on hand, you probably won’t need to submit successive loan applications too quickly. Consequently, if lenders see multiple hard inquiries, they may worry that you’re desperately seeking credit to make ends meet.

While it might seem unfair to be denied a loan because you need one, lenders do this to protect themselves from borrowers with a higher likelihood of default.

Newly approved loans may not show up on your credit report

If you’re applying for multiple loans in a short time period, lenders may worry that you’ve been approved for loans that haven’t yet been reflected on your credit report. Without understanding the full extent of your debt obligations, they may be inclined to reject your application.

Improving your finances takes time

Finally, the most important reason you should wait before applying again is that it can take several months to meaningfully improve your financial situation. Increasing your income and reducing your debt takes time and requires a disciplined approach to budgeting and saving. But in the end, you’ll look more appealing to prospective lenders.

Remember, improving your finances can be a long process, and you don’t want to undermine your hard work by submitting another loan application too soon.

Please note the below article contains links to external sites outside of OppU and Opportunity Financial, LLC.  These sources, while vetted, are not affiliated with OppU. If you click on any of the links you will be sent to an external site with different terms and conditions that may differ from OppU’s policies. We recommend you do your own research before engaging in any products or services listed below. OppU is not a subject matter expert, nor does it assume responsibility if you decide to engage with any of these products or services.

California Residents, view the California Disclosures and Privacy Policy for info on what we collect about you.