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Why Would Lenders Reject Your Personal Loan Application -- and What Should You Do Afterward?

Christy Bieber, The Motley Fool

Being rejected after applying for a personal loan is a major letdown. Here's what you should do if this happens to you.
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Couple looking at bills in dismay

When you're counting on a personal loan to help you finance a purchase or consolidate debt, it's upsetting to find your loan application has been denied. Unfortunately, this happens to many would-be borrowers.

It's important to understand why your loan application might be rejected -- as well as to understand your options for what to do afterward. This guide will provide insight into the financial issues that lead to rejection, as well as some tips on what you should do after being denied a loan.

Why would personal loan lenders reject your application?

Here are some of the most common reasons why a personal loan lender might reject your loan application:

  • Your credit score is too low: To lenders, your credit score indicates how likely you are to pay your debts on time and in full. If your credit score is low, it may be because you've made financial mistakes such as missing debt payments, because you haven't established a credit history yet, or because there's a harmful mistake in your credit report.
  • Your income is too low: Lenders won't allow you to borrow more than they believe you can afford to pay back. If you apply for a loan that's beyond your means to repay, a denial is inevitable.
  • Your income is too irregular: Lenders also want to be reasonably certain that you'll continue earning enough income to pay back the loan over time. If you just changed jobs and have a long history of irregular earnings, a lender may be reluctant to give you a loan.
  • You already have too much debt: If you've borrowed a lot of money relative to what you earn, lenders fear you'll have trouble paying back what you owe.
  • You've applied for tons of credit recently: Some lenders see it as a red flag when you've applied for lots of new credit in the past few weeks or months. They worry that you're getting in over your head, and they don't want to end up holding the bag if you find yourself unable to keep up with all your debt payments.
  • There are inconsistencies in your application info: If you provide details about your income that don't match up with the records the lender checks, the lender may reject your application out of fear you weren't forthcoming.
  • The lender can't verify the application information: Lenders don't just take your word for it when you provide details about your income or debt. If they can't verify the financial information you've provided -- for example, by looking at your tax returns or talking to your employer -- then you may be denied a loan.

What to do if a lender rejects your application

When your lender denies your loan application because of your credit report, the lender must provide a "Notice of Adverse Action." This is a notification that information in your credit file was used against you. In this notice, lenders must explain what the problem was and tell you how to contact the credit bureau that provided the information.

If your loan was denied for some other reason, lenders usually tell you what the problem was when you receive your denial notification -- but not always. If the lender doesn't provide the information but you need to understand the exact reason you were rejected, you could try to call and ask, but there's no guarantee the lender will disclose all the details in their decision-making process.

If you know the reason for the loan denial, you can take steps to correct the specific issue. For example, if your loan was denied because of a problem with your credit, you should:

  • Obtain a copy of your credit report to check for mistakes and see what negative information has been posted.
  • If there are mistakes, dispute the inaccuracies with the three major credit bureaus -- TransUnion, Equifax, and Experian. An investigation will be conducted, and within 30 days or so, a decision will be made. In many cases, inaccurate information will be removed.
  • Consider contacting creditors to ask them to remove negative information. Creditors don't have to remove negative information if it's accurate, but if you made a mistake and made a single late payment, you could write a goodwill letter to your creditor and ask if they'd be willing to do so. If they are, this could significantly improve your credit score.
  • Pay down debt. If your credit score is low because you're using too much of your available credit, repaying some of your debt could lead to a score increase.
  • Work on building credit. If you haven't yet had time to build credit or have negative information on your report, you can improve your score through responsible borrowing behavior. This includes making on-time payments to all your credit accounts. If you don't have any credit yet, try applying for a secured card or student card so you can start building credit.

If your loan was denied for other reasons, you can try to correct the problem -- but the approach you take will depend on the reason for the denial. You could provide missing information, for example, or submit a new application with more accurate details. Or you could work steadily at your current job to develop a stable employment history, or try to increase your income by taking on a side gig.

If you need to rebuild your credit, increase your income, or develop a history of stable employment, this could take time -- so you'll usually need to wait months or even years before you're ready to apply for a loan again. If you need financing right away, you could try to apply with a different lender that may have looser qualifying requirements, or you could try applying for a smaller loan that you might qualify for more easily.

Another option is to try to apply for a loan with a qualified cosigner. This is the quickest way to get approved for a loan after a prior denial, but you need to find someone who not only has good credit but is also willing to cosign and share responsibility for your debt -- and that's a big ask.

Dealing with a loan denial

There are many reasons you may be denied for a personal loan -- and many steps you can take to respond to a denial and improve your chances of getting approved in the future. You just need to understand the reasons you were rejected and make a plan to become a more qualified borrower so you'll have your choice of lenders next time you apply.

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