dragana991/Getty Images; Illustration by Austin Courregé/Bankrate
Key takeaways
- Lenders tend to tighten credit requirements during tough economic times, making it harder to get approved for credit products, including loans.
- Credit score, income and debt-to-income ratio are the main factors lenders consider when reviewing applications.
- Paying down debts, increasing your income, applying with a co-signer or co-borrower and looking for lenders that specialize in loans within your credit band could increase your approval odds.
If you recently applied for a personal loan and got denied, you’re not alone. Bankrate’s Credit Denials Survey found that half of applicants who applied for a loan or other financial product have been denied since the Fed launched an 18-month rate-hike campaign that began in March 2022.
This is likely in part due to the fact that lenders tend to tighten their credit requirements during tough economic times to mitigate risks, which in turn makes it harder to get approved for a loan. Luckily, there are a few steps you can take to improve your approval odds, even in a tough economy.
Credit denial statistics
- 50% of Americans who have applied for credit products since the Fed rate hikes in March 2022 have gotten denied, according to Bankrate’s Credit Denials Survey.
- 17% were denied more than one loan or financial product.
- 21% of Americans say it has gotten harder to access credit since the Fed increased interest rates.
- New credit card applications, including balance transfer cards, accounted for the majority of credit denials at 19%.
- Credit card limit increase denials (at 11%) came in second, followed by personal loans (at 10%).
Reasons for personal loan rejections
There are several reasons someone may have their loan application rejected, including bad credit, a large amount of debt or an unreliable source of income.
Bad credit history
Bad credit history may indicate to creditors that you are having or had trouble repaying what you owe based on past transactions. Although your credit score is generally a good indicator of credit history, lenders also look at your overall financial history to establish your creditworthiness.
High DTI
If you have a debt-to-income (DTI) ratio — or debt-to-income — ratio of 50 percent or higher, you might have too much debt for a lender to give you a new loan. If that’s the case, it’s best to apply after reducing your overall debt, as this will increase your chances of approval.
Incomplete application
Your loan rejection could be as simple as missing a key field or document needed for verification. If you are rejected for a loan, double-check that you fully completed the application and submitted all the required personal loan documentation.
Lack of proof of steady income
Consistency is key because it helps lenders understand your job landscape moving forward. Because jobs can vary depending on the line of work, lenders may look at tax returns to get a better overview.
Loan doesn’t fit the purpose
Lenders might have certain restrictions on what you can and can’t do with loan money. For example, some financial institutions don’t allow you to use a personal loan to cover post-secondary education expenses. The lender may be able to offer you alternatives to better fit your needs.
Unsteady employment history
Lenders like to see a steady income stream over time. If you are between jobs or have a history of unsteady employment, this could indicate to lenders that you may not be a reliable borrower.
When to apply for a loan again
Each time you apply for a loan or credit product there is a hard inquiry that can temporarily lower your score. That’s why it’s a good idea to wait at least 30 days before you apply again. However, if you don’t need the funds urgently, experts recommend waiting at least six months.
It’s also important to ask the lender why your loan was rejected before you submit another application. For example, if the lender says it was because your credit score was low or your DTI was too high, you could focus on improving those factors before applying again.
Why it’s been harder to get approved for a loan
Borrowers with good to excellent credit are still most likely to get approved for a loan, although the annual percentage rate (APR) lenders offer is likely to be much higher than it would have been last year.
Over the past few years, the Federal Reserve kept its benchmark rate at a 23-year high to combat persistent inflation. As a result, rates for mortgages, personal loans and auto loans rose. However, the Fed cut its benchmark rate by .50 percentage points at its September 2024 meeting.
Since the Fed cut rates, average personal loan rates may come down — but it will likely take some time.
How to improve your chances of qualifying for a loan
There are a few measures you can take to improve your approval odds when applying for a personal loan. But for any of these steps to work, you must know why you got denied in the first place.
Under the Equal Credit Opportunity Act, lenders must disclose the reason for denying your loan application as long as you inquire about it within 60 days of the decision. This is known as an adverse action notice. Knowing this information is key to developing an effective strategy to get approved next time.
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Your credit score is one of the most important factor when qualifying for a loan. It also goes into determining how much you’ll pay in interest. As a rule, the higher your credit score is, the more likely you are to receive favorable APRs and low fees.
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 week 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 disputed or corrected.
Aside from that, make all debt payments on time and keep your credit card balances low to avoid piling on extra debt. Both are simple ways to nurse your credit back to a healthy state. You can also become an authorized user on someone else’s account. However, this will only boost your score if the person has a good payment history and a low credit utilization rate.
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Lenders typically look for a DTI under 36 percent, although some allow applicants with DTIs as high as 50 percent. If a high debt-to-income ratio affects your ability to take out a loan, work on paying down your current debts before applying for more credit.
One way to do that is to tighten your budget and cut down on monthly credit card expenses. If you have different types of debt, you can try using a common strategy, like a debt snowball or debt avalanche.
The snowball strategy consists of paying off your smallest debt — regardless of the interest rate — and moving up from there. The avalanche method focuses on paying off the account with the highest interest first — regardless of the balance — and working down to the lowest rates.
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A higher income can help lower your DTI and make you more attractive to lenders. Finding ways to supplement your income could improve your chances of qualifying for a loan. Consider asking for a raise at your current job, especially if you haven’t received one in a while.
Another option is to take on a side gig. Bankrate’s Side Hustle Survey found that 39 percent of U.S. adults have a side hustleOut of that group, 33 percent use their side hustle to pay for regular living expenses.
Some viable side hustle options that don’t require a significant commitment if you already have a full-time job include tutoring, dog walking and online sales.
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Various lenders have different requirements, rates, terms and fees. Research lenders and compare rates before applying to one. The lender that will work best for you depends on your specific financial situation and needs.
Prequalifying with a few lenders is a good idea to see exactly what you will be eligible for before fully applying. 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.
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Although prequalifying is not guaranteed approval, getting a prequalified offer means you met the initial requirements. Many lenders allow you to prequalify without affecting your credit score or making a commitment. However, your application could be denied if something changes, such as your income or credit score.
When you are ready to fully apply, ensure that your documentation is up to date to reflect all the hard work and changes you made. If you are still unsure if you will qualify, try finding a co-signer.
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Co-borrowers and co-signers are typically creditworthy friends and family who take on equal legal responsibility for the loan. This can boost the chances of approval of the primary applicant and help secure a better rate.
The main difference between the two is that the co-borrower has access to the loan funds, while the co-signer doesn’t. Both co-borrowers and co-signers are equally responsible for payments, but co-signers typically only make payments if the borrower is at risk of defaulting on the loan.
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Secured loans are backed by an asset, such as a car or a savings account. Because secured loans are guaranteed by an asset, lenders tend to be more lenient with credit requirements and offer lower rates. That said, if you default on the loan, the lender could take legal action to seize the asset.
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If you need money quickly, there are loans for bad credit borrowers that tend to have more relaxed requirements. However, be aware that your interest rates may potentially be higher than if you qualified for a good credit loan.
Regardless, if you can handle the higher payments and interest, without tilting your budget, it may be a good option to explore.
Personal loan alternatives
If your personal loan application is denied, there are several personal loan alternatives to consider, including:
- Home equity loans: Similar to personal loans, home equity loans come with fixed rates and a lender issues you a lump sum if approved. Since the loan is secured by your home, you may find it easier to qualify with bad credit. That said, a significant downside to consider is that you could lose your home if you default on a home equity loan.
- Home equity lines of credit: A home equity line of credit (HELOC) is another way to tap your home’s equity. This product allows you to borrow against your home’s equity as needed — up to your credit limit. But like a home equity loan, you could risk losing your home if you default.
- Cash advance apps: If you need to borrow a small sum to tide you over until your next pay day a cash advance app could be an excellent solution. Most cash apps don’t require credit checks, so you could qualify for a short-term loan even with poor credit.
- Buy now, pay later loans: A buy now, pay later (BNPL) loan could be a solid alternative if you want to break a purchase into installments. Some retailers partner with BNPL apps that allow you to purchase an item immediately online. After making the purchase, you typically repay the loan by making four interest-free payments over two-week periods — though terms vary.
- Emergency loans: There are some lenders that offer emergency loans to cover an unexpected expense. These are processed quickly, and you may be eligible even with bad credit.
Bottom line
If you have been denied a loan, take the time to review your application and see what went wrong. Then, work on improving the aspects that got you denied in the first place.
If you’re in a crunch, there are lenders that offer loans to those with bad credit. Be sure to carefully consider the interest rates and your ability to make payments before you apply.
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