If your new loan application was denied for any of the reasons above, here's a short checklist of action items you can go through to improve your chances of being approved next time.

 

1. Review your decline notice.

The very first thing you should do is understand why you were declined for a personal loan. Any lender who denies loan approval is required to send an adverse action notice, which lists the reason(s) your application was declined. If you were turned down because of something on your credit report, this notice will tell you what in your credit report led to the decline and the name of the credit bureau that reported the information. Because of the decline, you are eligible to receive a free copy of your credit report.

 

2. Review your credit report.

Check your credit report for errors and dispute any inaccuracies with the credit bureau about your personal finance history. At least one in five consumers have an error on their credit reports, according to a study by the Federal Trade Commission. For example, it’s possible someone else’s account information could have been included in your report. Or, if you filed for bankruptcy in the past, be sure your report does not include accounts that have been discharged.

Keep an eye out for inaccurate account information. If you paid a bill on time that is reported late, for example, you can dispute that information with the reporting credit bureau. Closed accounts reported as still active could have a negative impact on your credit score if the account has negative information. Go over not only each account but your account history as well.

And always be on the lookout for any signs of identify theft such as unfamiliar accounts, purchases you didn’t make, and credit applications you didn’t complete.

 

3. Boost your credit score.

If your loan application was denied despite an accurate credit report, it could be your credit score is too low. Common reasons include:

  • Late payments: If you've missed payments, be sure to get caught up, and continue making on-time payments. Late payments can stay on your credit file for up to seven years.
  • Debt-to-income ratio: Are your credit balances high compared to your income? Pay down your debts as quickly as possible to lower your DTI and total credit utilization. 
  • Credit utilization: Are your cards close to their maximum limits? Remember, it's not just total credit utilization that matters, but each account limit. Try to bring all your credit balances below 30% for a score boost.
  • Recent inquiries: Have you been applying for credit a lot recently? Business loans, home loans, auto loans? Too many hard inquiries in a short period of time will hurt your credit score and may signal that you’re in financial trouble and need cash quickly. Limit applications to only what you need, and try again in a few months. Remember, a hard credit inquiry will impact your credit, but a soft inquiry won’t. Most applications are hard inquiries, while pre-approvals are soft inquiries. Learn more about the differences between a hard and soft inquiry.
  • Lack of credit history: If you just don't have enough credit history, consider becoming an authorized user on the account of a spouse or parent who has good credit. Make sure the account you sign onto has a good payment history—the older the account, the better. You may also consider a secured credit card, which lets you put down a deposit and borrow against it. The limit may not be high, but you’ll earn a credit score boost each month as you make payments on time.

4. Find a co-signer.

If you don’t have a steady income, have had some financial setbacks, or are still building a good credit history, applying with another person could help get your application approved. Applying with a cosigner or co-borrower might even help you secure a better loan than what you would’ve received on your own, i.e., a better rate, a higher loan amount, or both. And there are additional factors to consider when applying for a joint personal loan. For example, both individuals are obligated to repay the loan, and both have rights concerning the funds. 

 

5. Apply for a smaller loan amount.

Consider asking for a smaller personal loan than what you need, or asked for previously. A smaller loan will appear less risky to a lender and may help improve your overall DTI picture which could help you qualify.

While applying for less than you need may delay reaching your goal as quickly as you had hoped, it could turn out to be the more financially responsible path. For example, if you’re able to start paying down debt with a smaller loan at a lower rate sooner rather than later, that's a step in the right direction. Always consider all possible options, and run the numbers given your personal financial situation.

 

6. Shop around.

Not all lenders have the same lending criteria and requirements. Rates, fees, and terms can also vary widely from lender to lender. By shopping around and comparing several loan offers against each other, you could end up saving hundreds, or even thousands, of dollars over the course of your loan. And after working through steps 1-5 above, you may want to try applying through a different lender simply to see if that makes any difference.