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7 Reasons Why Your Personal Loan Was Declined (and 6 Ways to Fix It)
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It’s hard not to take it personally when you get declined for a loan. But if your loan application was denied, it’s important to identify the reasons why. Once you understand what happened, you can take steps to improve your chances for next time.
Some common reasons for having a loan denied include a low credit score, a high debt-to-income (DTI) ratio or insufficient income. So if you need a loan but keep getting declined, read on for a look at seven possible reasons you could be rejected for a loan, followed by six tips on what to do about it.
Why you may have been declined for a personal loan
There are several reasons you can be denied for a personal loan, but fortunately you don’t have to guess. Lenders are required to send you an adverse action notice within 30 days explaining your loan rejection. If you need additional clarification, you can also call the lender and ask what happened.
If you need a loan but get denied, here are some possible culprits:
- Your credit score was too low
- Your debt-to-income ratio was too high
- You tried to borrow too much
- Your income was insufficient or unstable
- You didn’t meet the basic requirements
- You had missing information on your application
- Your loan purpose didn’t meet the lender’s criteria
1. Your credit score was too low
When a lender views your personal loan application, it commonly considers your FICO credit score, among other factors like your income. Your credit score suggests to lenders how good you may be at managing money. Factors like your payment history and amount owed are heavily weighed in your credit score.
If you’re looking for an unsecured personal loan — a loan that doesn’t have collateral attached to it — lenders usually have stricter lending requirements.
Some lenders publish their minimum credit requirements. If you fall below a lender’s minimum, you’ll likely struggle to qualify for one of its loans. Even if you’re approved for a loan with a low credit score, lenders will charge you a higher rate to compensate for the risk of you not being able to repay the loan.
2. Your debt-to-income ratio was too high
Another problem you may have is a DTI ratio that’s too high. This ratio compares your monthly debt total with your monthly gross income. For example, if your monthly debt payments are $3,000 and you divide that by your monthly income of $5,000, then your DTI ratio would be 60%. A high ratio such as this could signal to lenders that you might struggle to afford debt repayment.
For that reason, it’s best to aim for a DTI ratio of 35% or less, which is generally considered good. That way you’d increase your chances of loan approval.
3. You tried to borrow too much
If you try to borrow more than you can afford to pay back, a lender may deny your request for a personal loan. This is because the amount the lender approves you for is based on your income and other debt obligations. After reviewing your finances, the lender may decide you don’t qualify to borrow a certain amount.
For example, let’s say you try to take out a personal loan for $100,000, knowing that you don’t earn enough income to afford the monthly loan repayment. Since you’re requesting an unrealistic amount, the lender will most certainly deny you.
4. Your income was insufficient or unstable
Along with looking at your credit score and DTI ratio, lenders also examine your income to determine whether you’ll be able to pay back your loan. Essentially, they want to make sure you can afford your monthly payments and won’t default on the money you owe. If they decide your income is insufficient for the amount you want to borrow — or if it appears unstable from month to month — the lender might reject your application.
5. You didn’t meet the basic requirements
Every lender sets its own requirements, but most look for a few basic criteria, such as,
- You meet the minimum age requirement (typically 18)
- You’re a U.S. citizen or qualifying resident
- You’re employed with a valid bank account
Before applying, make sure to review the basic requirements to ensure you meet them.
6. Your application was missing information
A lender might automatically reject your application if it’s missing key information or documents. Make sure to read over your application before you submit it, as well as upload any supporting documentation that a lender asks for. You might also call the lender directly to double check that it received everything it needed to process your application.
7. Your loan purpose didn’t meet the lender’s criteria
While you can use a personal loan for almost anything, there are certain restrictions you need to abide by. For example, you’re usually not supposed to use a personal loan for college tuition. A lender might also have a rule against you investing the money or using it for gambling. If you indicated a loan purpose that’s outside the scope of a lender’s rules, your application could be denied.
How to improve your chances of getting a loan
Once you’ve identified why your loan application was denied, you can take steps to improve your chances for next time. Here are some strategies that could help:
- Build your credit score before you apply
- Look for ways to increase your income and pay down debt
- Request a more realistic loan amount
- Apply with a cosigner
- Put up collateral
- Prequalify with several lenders
1. Build your credit score before you apply
To avoid being denied for a personal loan due to having a low credit score, the best thing you can do is build or repair your credit score before applying. Here is a look at how your credit habits and debt is factored into your credit score:
Here are some actions you can take now to improve your credit score:
- Get a copy of your credit report and dispute any errors.
- Set up automatic bill payments to avoid missed or late payments.
- Pay down credit card debt to decrease your credit utilization.
- Take out a credit-builder loan.
- Seek nonprofit credit counseling for help with debt, whether it’s current or past due.
2. Look for ways to increase your income and pay down debt
To improve your DTI ratio, you have two options: increase your income or pay down your debt. If you do both simultaneously, you’ll improve it faster. However, increasing your income isn’t an easy task, but there are other strategies you can use to get out of debt.
For example, you could try the debt snowball repayment method. This method involves paying off your lowest amount of debt first before tackling the next-smallest debt balance. Alternatively, you could use the debt avalanche method, which involves paying off the debt with the highest interest rate first before paying off the next debt with the highest interest. Although the avalanche method is ideal if you want to minimize interest costs in debt repayment, a debt snowball can keep you motivated over time by offering short, quick wins.
Using the example from the previous section, imagine if you increased your monthly income from $5,000 to $6,500, while reducing your monthly debt payments to $2,000. Your DTI ratio would be a little over 30%, which would increase your chances of being approved for a loan.
3. Request a more realistic loan amount
The solution to this problem is to request a more realistic loan amount. To do this, take a look at your budget and use a personal loan calculator to get a better idea of how much money you can afford to spend each month repaying your personal loan.
By doing this, you’ll increase your chances of getting approved. In addition, you won’t risk taking out more debt than you can handle.
4. Apply with a cosigner
You can also consider getting a personal loan with a cosigner. Having a cosigner with a good-to-excellent credit score can decrease your chances of being denied for a personal loan and help you secure a better interest rate.
If you find someone who’s willing to cosign for you, explain to them that they’ll be responsible for repaying the loan if you’re unable to pay it. But you should also let them know that if you make a late payment, their credit score could suffer.
5. Put up collateral
If you’re having trouble getting approved for an unsecured personal loan, try taking out a secured personal loan. Unlike an unsecured loan, a secured loan is one that is backed by collateral, like a car title or cash deposit. The upside of this move is that it can increase your chances of getting approved; however, the downside is that if you fail to repay, the lender can take your collateral.
6. Prequalify with several lenders
Many lenders let you prequalify for a loan with no impact on your credit score. Since every lender sets its own borrowing criteria, prequalification is a handy way to assess your likelihood of being approved for a personal loan without putting your credit score on the line.
It’s worth noting, however, that getting approved during the prequalification process doesn’t mean you’ll definitely get a loan. It’s not a guarantee, but it is a useful way to gauge your chances and compare rates from various lenders.
How to get a personal loan with bad credit
Although building your credit and improving your DTI ratio will help, they can take a lot of time. If you need money from a personal loan now and can’t wait to build your credit score to apply again, there are other options you can take to get a loan when you have bad or no credit.
Check with your local credit union
One of the first options you should consider is checking to see if your local credit union will offer you a personal loan. Credit unions are not-for-profit organizations that can offer more competitive personal loans than national banks. Your employer might have a credit union for its employees, so check there first. Some credit unions will allow you to join if you’re the family member of someone who’s a member of a specific group or organization.
If you don’t have access to one through your employer or a family member, do some research on credit unions for personal loans in your area. Some credit unions will require you to have military experience or be a member of a certain service organization to gain membership.
Plus, if you become a member of a federal credit union, you could gain access to a payday alternative loan (PAL). These unsecured loans were designed to help consumers avoid the high interest rates of payday loans — the maximum interest rate charge on them is 18% (or 28% on some short-term, small loans). The downside is that the terms of these loans are short — they typically have a repayment term of one to 12 months.
Loan denial FAQ
If you’re still unsure why you keep getting declined for a personal loan, these answers to some frequently asked questions might shed some light:
- What are the reasons a personal loan application gets declined?
- What should you do if your personal loan is denied?
- How can you avoid having your loan application rejected?
- How long should you wait to apply again after your loan application was declined?
What are the reasons a personal loan application gets declined?
Personal loan lenders look at a variety of criteria when deciding whether or not to approve you for a personal loan, including your credit score and history, debt-to-income ratio, income and employment and the purpose of your loan.
Some reasons your loan application could be denied include a low credit score or thin credit profile, a high DTI ratio, insufficient income, unstable employment or a mismatch between what you want to use the loan for and the lender’s loan purpose requirements.
It’s also possible that you made a mistake or were missing information on your loan application. If this is the case, contact the lender about fixing the issues.
What should you do if your personal loan is denied?
If your loan application is denied, your first order of business is finding out why. Read through your adverse action notice to find out what happened. You can also call the lender for an explanation.
Once you’ve pinpointed the problem, you can take steps to remedy it. For example, if your credit score is too low, you can try to improve it before applying again. Or you could pay off debts to lower your DTI ratio.
It might also be worth shopping around with different lenders to see if you can find one with more forgiving requirements. A couple of other options to explore include applying for a personal loan with a cosigner or opting for a secured loan over an unsecured loan.
How can you avoid having your loan application rejected?
If you’re worried about your loan application being rejected, try to research a lender’s requirements before you submit your application. You might be able to find this information online, or you could call the lender to discuss its criteria.
Once you understand what a lender is looking for, evaluate your own finances and make improvements where you can. If you find that your credit score falls short, you can also look into applying with a cosigner.
Finally, take advantage of online prequalification so you can get a sense of your chances for approval without dinging your credit score. As mentioned, prequalifying for a loan through the LendingTree marketplace lets you check your offers with several lenders at once.
How long should you wait to apply again after your loan application was declined?
If you need a loan but keep getting declined, you might want to wait several months before applying again. For one thing, racking up a bunch of hard credit inquiries can harm your credit and look bad to a lender. And for another, it takes time to improve your personal finances, whether that means building your credit or reducing your DTI ratio.
If, however, you discover that your loan application rejection was a result of a mistake you made on your application, it may make sense to contact the lender immediately to fix the error and run your application again. And if you haven’t applied yet, make sure to avoid these 13 common personal loan mistakes.