How to recover if you’re rejected for a personal loan

By Steven Nicastro/ Associated Press

Getting rejected for a personal loan can feel like a punch to the gut. It’s easy to get discouraged, especially if it delays plans to consolidate debt or renovate your home.

Instead of taking the rejection personally, use it as motivation to build your credit and supplement your income so you win approval the next time you apply.

Here’s how to recover from a personal loan rejection.

Ask for a reason

Lenders are required to disclose the exact reasons why they denied your application, according to the Equal Credit Opportunity Act .

Online lender Marcus by Goldman Sachs sends an explanation within seven to 10 days after a rejection, says Elisabeth Kozack , vice president of product strategy and customer experience at Marcus.

Common reasons for a loan denial at Marcus include having a low credit score and insufficient income to repay the loan, Kozack says.

Build your credit

Making timely payments on all of your debts and keeping your credit balances low are two steps to building credit, but don’t stop there.

• Check your credit report for errors: Common errors that may hurt your credit score include payments that are wrongly reported as being late or delinquent, and accounts showing the wrong balance, according to the Consumer Financial Protection Bureau.

You can get free copies of your credit reports once a year from AnnualCreditReport.com. Dispute any errors online, in writing or by phone.

• Get a credit-builder loan: Instead of giving you the borrowed money, lenders hold it in a bank account while you make on-time payments toward the loan. These payments are reported to the credit bureaus, helping to build your score. You get the money only after you’ve made all your payments.

Credit-builder loans are available through credit unions, community banks and Community Development Financial Institutions.

• Become an authorized user on someone else’s credit card: Ideally, the account holder has a strong payment history, and the credit card issuer reports authorized users to all three credit bureaus.

Pay off debit

Your debt-to-income ratio helps lenders determine if you have too much debt. Divide your monthly debt payments by your monthly income to see your DTI ratio expressed as a percentage.

Borrowers with high DTI ratios (40% or greater) may be more likely to miss loan payments and have a harder time getting approved.

Scrutinize your budget for places you could trim an expense and use the savings to pay off debt, and avoid taking on new debt ahead of your next personal loan application.

Grow your income

A higher income lowers your DTI ratio and can help you qualify for a loan. You may not need to ask your boss for a raise, either.

Consider a side job such as ride-hail driving or tutoring, to put an extra hundred dollars or more in your pocket each month.

And when you reapply, include all sources of household income on the loan application — not just income from your full-time job, but also your spouse’s income, investment income, child support, alimony or military pay.

Compare lenders

Spend a few months getting your credit in shape and rebalancing your DTI. When you’re ready to reapply, choose a lender that caters to borrowers like you.

• Online lenders most often lend to borrowers with good or better credit (690 to 850 FICO), but there are some that accept lower credit scores. You can pre-qualify online to preview rates and terms you’re likely to receive, with no impact to your credit score.
• Credit unions are nonprofit financial organizations that consider your entire financial picture, and may provide cheaper loan options for bad credit (300 to 629 FICO). You’ll need to become a member of the credit union before applying.
• Banks offer personal loans with low rates and discounts for customers with accounts in good standing. You’ll likely need good credit to qualify.

Get prepped

Take a fresh approach with your next loan application.

• Gather documents. Lenders need to verify information you’ve provided on your application, such as tax returns to confirm your income. Having these documents prepared can make the application process go smoother.
• Verify all information. False information on your application, such as the wrong address and misstated income, could lead to a loan denial. Double-check all details before submitting your application.
• Add a co-signer. If you don’t meet a lender’s credit score requirements, consider adding a co-signer with good credit to your application. This can help you qualify and get you a lower rate.

Learn more

NerdWallet: 4 steps to pre-qualify for a personal loan http://bit.ly/nerdwallet-personal-loan

Federal Trade Commission: Your equal credit opportunity rights https://www.consumer.ftc.gov/articles/0347-your-equal-credit-opportunity-rights

Federal Trade Commission: Disputing errors on credit reports https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports