7 Reasons Your Personal Loan Was Denied — and How to Fix Each One
Being denied a personal loan can be frustrating, but it’s important to understand why you weren’t approved. Once you know the reasons why your application for a personal loan was rejected, you can take steps to prevent it from happening again.
7 reasons why you may have been denied a personal loan
When you’re denied a personal loan, lenders must typically send an adverse action notice under the Regulation B of the Equal Credit Opportunity Act. Adverse actions can mean a loan denial or being offered a smaller loan than you requested.
The notice must be provided within 30 days after the lender receives your completed application. The notice must include why you were denied or how you can request those reasons.
Generally, here are some possible reasons why a personal loan application could be denied.
| Denial reason | Best fixes to try first |
|---|---|
| Credit score too low | Check credit reports for errors, follow best practices on credit score health (like always paying bills on time) |
| Debt-to-income (DTI) too high | Pay down debt and/or increase income |
| Insufficient/unstable income | Increase income, strengthen income documentation or apply for a smaller loan |
| Requested too much money | Ask for a smaller loan or shorter loan term |
| Didn’t meet basic requirements | Closely review eligibility requirements before applying |
| Application incorrect/incomplete | Reapply with correct docs and consistent info |
| Loan purpose not allowed | Choose a different lender or loan type that meets your needs |
1. Your credit score is too low
Your FICO Score indicates to lenders how likely you are to repay your debts. This score is determined by a number of factors, including payment history, credit utilization and how long you’ve had credit. In general, the higher your credit score is, the more trustworthy a borrower you are thought to be.
Since personal loans are often unsecured loans, meaning they are not backed by any form of collateral, your credit score often plays a very important role in the approval process.
If your score doesn’t meet a lender’s minimum eligibility requirements, your chances of loan approval are low. Plus, even if you do qualify, you’ll likely be charged a higher interest rate than borrowers with better scores.
It’s a good idea to research a lender’s minimum credit score requirement before applying for a loan. For best results, you’ll want to make sure you comfortably exceed that metric. If you don’t, it may be worth shopping around for another lender or looking into alternative financing options.
Follow LendingTree’s expert guidance on improving your credit score. Alternatively, consider your secured personal loan or joint personal loan options.
Ask LendingTree: Can you still get denied for a personal loan with a good credit score?
LendingTree staff writer Lauren Clifford shopped for a personal loan 15 times to see what the experience is really like. We asked her to share something she learned during the process.
You can get denied with good or even excellent credit — I did. Lenders look at more than just your credit when evaluating you for a loan. You could be denied for applying for more money than you can afford to pay back, for having a high debt-to-income ratio or even for making an inconsistent income.
2. Your debt-to-income ratio is too high
Your debt-to-income ratio (DTI) is another financial metric that tells lenders how likely you are to be able to repay a loan. This ratio measures your total income against all of your existing debts. It shows how easily you’ll be able to manage keeping up with an additional monthly payment.
You can check your debt-to-income ratio by dividing the sum of your existing debt payments by your gross monthly income. For DTI, debt includes mortgage/rent payments, credit card payments, car loan payments and other debts. Don’t include non-debt expenses like groceries or utilities.
For example, if you have a total of $3,000 in monthly debt payments and you divide that number by a monthly income of $5,000, you’d have a DTI of 60%.
Lenders often prefer a lower DTI — sometimes as low as under 40%. Maximums can be higher depending on the lender, type of loan and your overall borrowing profile.
Increase your income or pay down your debts. For starters, here’s how to earn extra cash or budget to pay off debt. You could also apply for a smaller loan amount altogether.
3. Your income was insufficient or unstable
In addition to your credit score and DTI, lenders also consider your income when making a decision on loan approval. Essentially, they want to ensure you have enough money coming in to keep up with your monthly payments so you don’t default on your loan.
Lending unsecured funds can be risky, and if you have a low salary or your income is unstable, the lender may not want to take a chance on you.
Some lenders publish minimum income requirements along with their other eligibility criteria. If your income is on the lower end or is spotty, it may be worth searching for a lender that is upfront about these qualifications so you can be more confident that you’re a match.
Consider applying for a loan with a cosigner who can help boost your loan approval odds or waiting to apply again until your income is more stable.
4. You tried to borrow too much money
After looking at your financials, your lender will determine the maximum amount they’re willing to allow you to borrow. This figure is typically based on how much you can comfortably afford to repay each month when taking your current income level and debt obligations into account.
If you request to take out a personal loan that’s larger than you can feasibly manage, the lender may reject your application entirely. Rather than aiming for a high amount, it’s better to be realistic and request a loan amount that makes sense given your financial situation.
You simply need to request a lower loan amount. Punch numbers using LendingTree’s personal loan calculator.
5. You didn’t meet the basic application requirements
In addition to setting specific financial eligibility criteria, most lenders also put forth a few basic qualifying requirements you’ll need to meet in order to be considered as a borrower. Every lender’s requirements will be a bit different, but in general you can expect the following:
- You must be of the age of majority in your state (typically 18).
- You must meet any citizenship or residency requirements set by the lender.
- You may need to have a permanent address and bank account.
- You may need a working email address.
If you don’t ensure you meet the basic requirements before applying, you can expect to be rejected for a personal loan.
Review the lender’s basic eligibility requirements before formally applying and consider prequalifying for a loan in the meantime.
6. Your loan application was incorrect or incomplete
An incorrect or incomplete application can delay approval or result in a denial.
Along with the application itself, you’ll likely be expected to submit some supporting documentation, such as pay stubs, bank statements or tax returns. This information helps the lender make their decision. Without it, they won’t be able to make an informed determination on whether or not you qualify for a loan.
Read over your application to catch any errors before you apply for the loan, and make sure that you’re submitting the correct materials before you send everything in. It may also help to call the lender and double-check that they have everything they need once you’ve sent in all of your materials.
Read up on common personal loan requirements and be prepared to provide the typically requested paperwork and details.
7. Your loan purpose didn’t match the lender’s criteria
Sometimes lenders will also impose use restrictions, or limits on how you can use your loan funds. For example, many lenders don’t allow their personal loans to be used to cover education costs or business expenses.
Be sure to read the lender’s fine print to verify that you intend to use the money from your loan for an approved purpose. Otherwise, your application could be denied.
Carefully review a lender’s loan purpose rules and stipulations before applying.
How to get a personal loan with bad credit
Qualifying for a personal loan can be more difficult when you have bad credit or no credit at all, but it’s far from impossible. Here are some tips on how to find a loan that works for you when you have a lower credit score.
- Shop around for a lender: Since every lender sets their own eligibility criteria, shopping around for the right lender can be the key to securing loan approval and an affordable interest rate. It’s a good idea to collect loan offers from three or more lenders before deciding on the best pick for you.
- Consider a credit union: Credit union personal loans sometimes have more lenient qualifying requirements because they come from not-for-profit organizations. Do some research into credit unions in your area and consider applying to one where you meet all the eligibility criteria for membership.
- Look for bad credit loans: Some lenders simply have lower credit score requirements, making them a good fit for those with bad credit. Check out our list of bad credit loans to start researching your options.
Frequently asked questions
If your personal loan application gets rejected, the best thing you can do is strengthen your financial profile before applying again. Use the tips above — such as building your credit score, lowering your DTI ratio and adding a cosigner or collateral — to start bettering your chances.
When your personal loan request is rejected, the best thing to do is look into alternative financing options, such as credit cards, peer-to-peer loans, home equity loans or HELOCs.
There are quite a few things that might keep you from getting a personal loan, including a low credit score, a high DTI ratio, or providing incorrect or incomplete information on your application.
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