Key insights:
- There are many reasons a personal loan could be declined, such as lack of credit or unstable income
- Always check your credit report for mistakes that may have caused the denial
- To improve your loan approval chances, you can pay down debt first, apply for a lower loan amount or pre-qualify before applying
Getting denied for a personal loan can be discouraging, especially if it happens more than once. However, it doesn’t mean there’s nothing you can do. Understanding why you were denied — such as whether it was related to credit issues, income requirements or incomplete paperwork — may help you make changes to get approved the next time you apply.
Let’s explore several common reasons why a personal loan application might be denied and the actions you can take after a loan denial to help turn things around.
Common personal loan denial reasons
Here are some common reasons why a personal loan application may be denied:
Lack of credit
Borrowers with lower credit scores may be more likely to get denied for a personal loan. You could have a low credit score if you have a limited credit history or have missed loan or credit card payments in the past.
Your credit score helps lenders measure how likely an applicant is to repay a loan and it’s one of the most important personal loan eligibility requirements.
Lenders may have specific creditworthiness requirements, such as a minimum credit score, that you must meet to qualify.
Missing information or paperwork
A personal loan application involves some paperwork. If that information gets lost in the shuffle, that may lead to a denied application. Understanding what information the lender requires is key. Be sure to review your application before sending it off to ensure you’ve filled everything out correctly. If you’re confused about any part of the application, you may contact the lender for clarification.
Documentation that's commonly required includes:
- Proof of identity, such as a Social Security card, birth certificate, passport, driver's license, military ID or state ID
- Proof of address, such as a utility bill, lease agreement or mortgage statement
- Proof of income and employment status, such as pay stubs, W-2 forms, tax returns and bank statements
High debt-to-income (DTI) ratio
Your DTI ratio compares your total monthly debt obligations against your income. Lenders use DTI to help determine if you can afford to repay a loan. If your DTI is too high, that could make it harder to get approved for a loan. DTI requirements can vary by lender. In general, a lower DTI will make it more likely to get approved.
Insufficient or unstable income
Lenders may reject your personal loan application if they deem your income insufficient or unstable. From the lender’s perspective, a borrower with unreliable income has a higher chance of defaulting on the loan, which happens if you stop making payments.
Not meeting basic requirements
In addition to above, each lender may have specific requirements which vary among lenders, so it’s important to understand those requirements, and to make sure all are met.
What to do if you're denied a personal loan
If your personal loan application gets denied, there are a few things you could do to improve your chances the next time you apply.
Review your decline notice
Lenders are required to provide a decline notice that explains why your application was denied. Review this notice closely. It's possible you were declined due to a basic mistake, or inaccuracies, so knowing this information could help you resolve those issues.
Review your credit report
If your application was denied due to your credit score, the decline notice will include your credit score and the credit scoring agency that provided your credit information. Your next step is to get a copy of your credit report.
You can check your credit report for free once every week from each of the 3 major credit reporting companies: Equifax, Experian and TransUnion. If you find that there are errors on your report, you can dispute them with the applicable credit reporting agency, as well as the company that provided that faulty information, to get them removed from your credit report. Removing an error can have a positive impact on your credit score.
Build your credit before applying again
If you have a thin credit file or a low credit score, you may need to take time to build your credit before applying for another loan. Some of the steps you may take include:
- Keeping your oldest accounts open to maintain a longer credit history
- Paying down credit card debt to lower your credit utilization (the amount of revolving credit, such as credit cards, you’re using)
- Requesting that landlords or utility companies report payments to credit agencies
- Avoid applying for any other new credit until you've been approved for your personal loan
Pre-qualify for a loan
When you’re ready to apply, consider pre-qualifying for a personal loan first. That can help you understand whether you’re likely to qualify for certain personal loans and provide insight into what your terms might look like, without harming your credit.
Apply for a lower loan amount
Lenders can deny loan applications if the requested loan amount is deemed to be too high, given the applicant’s income and credit score. In that case, asking for a lower loan amount may help you qualify for a personal loan if you try again. Reevaluating how much you need to borrow can help you figure out if lowering your loan amount is a viable option for you.
Pay down debt
Your DTI ratio is another important personal loan factor that lenders use to determine whether you can repay a new loan, so paying down your existing debt may help you qualify in the future. A lower DTI ratio can help you look more creditworthy as a borrower, and free up more monthly income to repay a new loan.
A couple of common approaches to paying off debt are the debt snowball method and the debt avalanche method. With the snowball method, you focus on paying off debts from smallest to largest by allocating extra cash to your smallest debts each month. As you pay one off, you apply that extra money toward the next debt. The debt avalanche method focuses on paying off the highest-interest debt first before paying off the next highest interest debt. While the avalanche method could help minimize interest costs, the snowball method offers short-term wins that could keep you motivated over time.
Stay the course for a personal loan
It can be discouraging to get denied for a personal loan when you're looking to accomplish financial goals. But being denied now doesn't mean you'll never get approved. Take the time to improve your financial situation and address anything mentioned in a denial notice before applying again.
Citi allows you to pre-qualify for personal loans without a hard credit check, so you can get an idea of your approval chances and terms without an impact to your credit score.1
Personal loan denial FAQs
How long should you wait to reapply after a loan denial?
It may be wise to wait several months before reapplying for a loan following a denial. That’s because it often takes time to improve your financial situation. There is 1 key exception here: If your loan application was declined because of an error you made on the application, you should contact the lender immediately to address the mistake and resubmit the application.
How many times can you apply for a personal loan?
There isn’t a set number of times you can apply for a personal loan. However, keep in mind that each application adds a hard credit inquiry to your credit report. Each of those can negatively impact your credit score. Having several hard inquiries in a short period of time can also have a bigger impact on your credit score. If possible, use pre-qualification to help you narrow down offers without harming your credit.
How does a declined personal loan affect your credit report?
Getting declined for a personal loan doesn't show up on your credit report or impact your credit by itself. The biggest concern is the hard credit inquiry that occurs when you apply. Hard inquiries typically have a temporary negative impact on your credit score.
This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
1To check for offers you may qualify for, Citi conducts a soft credit inquiry. If you are presented with an offer and choose to proceed with the application process, Citi will conduct a hard credit inquiry which may have an impact on your credit score.
