Has the lender declined a personal loan? Yeah, that’s a real disappointment. But don’t take it too personally—there are usually some straightforward reasons behind these declines. The big ones are crummy credit scores (think late payments, maxed cards, etc., dropping you below 670), not having enough monthly income to cover the new payment based on their requirements comfortably, or already being stretched too thin with other debts eating up over 43% of what you make.
Job gaps or switching roles a bunch can also make them sweat about your income stability down the road. Having little credit history built up yet as a young buck is also an issue. And if you’ve had something like a bankruptcy or defaulted loan dragging your credit through the mud in the past couple of years, that’s an automatic veto until you can prove you’ve gotten back on track.
8 Reasons Why Personal Loans May Be Declined
So the lenders hit you with that dreaded personal loan denial, huh? Yeah, that’s a real kick in the gut when you’re counting on those funds. But don’t take it as a personal attack on your finances yet. Many factors can lead to a rejection, some avoidable and others requiring fine-tuning.
Low Credit Score
Let’s start with one of the biggies – a subpar credit score. Lenders want a FICO score of around 670 or higher before feeling comfortable extending that personal loan. Anything below that subprime territory suggests you might be a riskier borrower based on past credit mishaps like late payments, maxed-out credit lines, or loan defaults. Your credit score is a snapshot of your experience handling debt responsibly.
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High Debt-to-Income Ratio
Even if your credit score looks decent, lenders also crunch the numbers on your current debt situation compared to your income. They calculate this debt-to-income ratio to gauge if adding another monthly payment would push you into the financial danger zone. If your recurring debts consume over 43% of your gross monthly income, most lenders see that high DTI as a big red flag that you’re overextended.
Low Income
Lenders need to be confident that you’re earning enough real, verifiable money to affordably cover the new personal loan payment on top of your existing bills and living expenses. If the income you report from pay stubs, W-2s, tax returns, etc., doesn’t meet their minimum requirements for the loan amount you’re asking for, you’re likely headed for denial.
Unstable Employment or Source of Income
The amount of income isn’t the only thing under the microscope, though. Lenders also want to see that your earnings are relatively stable and consistent. Significant gaps in employment, constantly jumping between different jobs or gigs, or otherwise unpredictable income patterns can make lenders sweat about relying on that income long-term. Most want to see at least two years of steady, reliable income to feel good about extending a multi-year loan term.
Failure to Meet Basic Requirements
Different lenders also have particular criteria and qualifying requirements for personal loan approval. Some have hard floors for minimum credit scores, income levels, and maximum debt-to-income ratios you can’t dip below. If your overall financial profile doesn’t check those fundamental requirement boxes based on their standards, you’re automatically disqualified before they dig deeper.
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You Tried to Borrow too Much Money
There are limits on how much personal loan money lenders will let individual borrowers walk away with. These maximum loan sizes are calculated based on your income, existing debts, creditworthiness, and other unique factors. If you try getting overambitious and apply for significantly more cash than what the lender determines is appropriate for your current finances, say hello to rejection.
Your Loan Application Needed to be Corrected or Completed
Providing incorrect information about critical details like income, employment, or debt loads is an automatic red flag. Lenders have zero tolerance for inconsistencies or inaccuracies during the application process, even if unintentional. Miss a field or fudge a number, and you’re risking a denial.
Your Loan Purpose Didn’t Match the Lender’s Criteria
Finally, some lenders are strict about what borrowers can use personal loan money for. They might prohibit using funds to start a business, catch up on bills, or invest. If your stated purpose for the loan aligns differently from their criteria, you’re likely getting denied in favor of borrowers with allowable uses.
How to Improve your Chances of Qualifying for a Loan
Getting denied for a personal loan can sting, but don’t let it derail your financial plans. With some proactive steps, you can correct and increase your chances of getting approval next time.
Review and Build Your Credit Score
Since credit scores are a huge factor for lenders, this should be priority number one. Pull your credit reports and scour them for errors or negative items that unfairly lower your score. Dispute any errors with the credit bureaus to boost your score. You can also build a more substantial credit history through smart credit utilization and consistently paying bills on time.
Lower Your Debt-to-Income (DTI) Ratio
Lenders want to see you have plenty of monthly cash flow left over after covering existing debts. The lower your DTI ratio, the better. Pay down credit cards, loans, or other payment obligations you can afford to minimize. Or look at ways to increase your monthly income through a raise, side gig, etc., to lower the DTI percentage.
Find Ways to Increase your Income
On that note, boosting your monthly income can improve your loan approval chances. Explore opportunities for raises, promotions, or secondary jobs to bolster your earnings.
Compare Multiple Lenders
Each lender has unique underwriting criteria, minimum approval standards, and loan program specifics. Rather than forcing a fit, shop around and apply with lenders whose requirements best align with your current financial profile. You’re more likely to match with a lender who can comfortably approve you.
Prepare with Personal Loan Preapproval
Many online lenders now offer preapproval processes that allow you to get prequalified for loans and preview potential rates/terms with only a soft credit pull. This lets you assess your odds before applying and risking a strict inquiry that could further ding your credit score.
The key is being proactive about areas that may have stunted your initial approval chances.
When to Apply for a Loan Again After Denial?
- Hitting “reapply” many times without changing anything on your end isn’t going to change their minds magically.
- Instead, use this as a wake-up call to address whatever red flags they saw in your application.
- If income was a sticking point, look at ways to pick up a side hustle or try networking for a better job opportunity. You’d be surprised how even just a short 6-month period of steady, provable income from new work can reinforce the strength of your application.
- The key is giving it months, not weeks or days. Lenders want to see a trend of improved finances, not just a short burst before reapplying. I suggest waiting at least six months after your initial denial, if not longer, to get your finances adequately tuned up and let your credit file season a bit.
- And do more than reapply with the same lender that denied you! Different lenders have different underwriting criteria, so shop around and try your luck with someplace new once you’ve leveled up your financial profile.
How to Get a Loan With Bad Credit?
Obtaining a loan might take a lot of work, especially if you have a low credit score. Financial institutions frequently reject such applications outright. However, exploring new routes and utilizing inventive tactics might provide practical solutions.
Add a Co-Borrower or Co-Signer
One solid move is finding a co-signer with great credit to apply jointly. Lenders will look at your credit profiles, so having someone with a good credit score attached can help smooth the process. Remember that your co-signer is equally on the hook for paying it back if you flake out.
Consider Getting a Secured Loan
You can also look into secured loans where you put up collateral like a car or savings account. That lowers the risk for lenders, so they may be more willing to dismiss a poor credit file. The downside is you could lose that collateral if you can’t repay.
Conclusion
Personal loan rejections can be discouraging and are often caused by criteria such as credit score, debt burden, or income stability. Lenders favor candidates with a good credit history, moderate debt, and steady income to ensure repayment capabilities. As a result, if your credentials fall short, consider improving your credit score, decreasing debt commitments, or looking for ways to supplement your income before reapplying.
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