Finding a personal loan that fits your needs can feel like a step forward — until the application gets denied. It can be frustrating, especially if you’re not sure why it happened. If you’ve had an application denied, you’re not alone.
Loan denial happens more often than people think. Financial institutions look at a range of factors when reviewing a personal loan application, from your credit score and monthly income to your existing debt and application details.
Understanding what lenders look for can help you figure out what caused your application to be denied, and what to do next.
What reasons cause a loan application to be denied?
Loan applications can be denied for many reasons. There may have been an error on the application, you may not meet the minimum requirements or you may have applied for too large of a loan. Most lenders look at several factors when considering an application, whether it’s for a personal loan, credit card or line of credit. Here are some of the common reasons applications are denied.
1. You don’t meet the lender’s application requirements.
Most lenders will have a unique set of minimum requirements you need to meet to be eligible for a loan. This can include things like a minimum credit score, a minimum monthly income, an active bank account and more. Even if you miss the mark on one of these requirements, it can cause your application to be immediately rejected.
Before applying, make sure you do your research and ensure you meet the lenders minimum requirements. Keep in mind some lenders may require documentation, like pay stubs or bank statements. If you’re missing these documents, it can raise a flag on your eligibility.
2. The loan amount is too large.
Lenders want to ensure that you’ll be able to comfortably make the minimum payments on your loan. Requesting an amount that doesn’t align with your financial situation can lead to your application being denied.
If the amount you applied for is too high compared to your monthly income, the lender may consider the loan too risky. Applying for a lower amount may help you improve your chances of approval.
3. Your credit score is too low for the lender.
Your credit score gives a lender insight into your repayment history and how you handle credit in general. A low credit score, or a limited credit history, can make it harder to qualify for a personal loan, especially with traditional financial institutions.
Some lenders may have strict credit score requirements. However, there are alternative lenders who may look beyond your credit score and consider factors like income and your overall financial situation. Just be sure to do your research as some of these lenders may have higher interest rates.
4. Your debt-to-income ratio is too high.
Your debt-to-income ratio (DTI) looks at how much debt you’re carrying compared to your income. It’s a quick way for lenders to get an idea of a borrower’s financial load. It shows how much of your income is already spoken for.
To calculate your DTI, add up your monthly debt payments and divide that number by your gross monthly income.
If you’re carrying a significant amount of debt compared to your income, it may be harder to qualify for a new loan. Lenders want to make sure you have enough room in your budget to take on additional debt. Paying down debt can help improve your odds of approval.
5. There were errors on your application.
Sometimes a loan denial comes down to a mistake on the application. Maybe a number was mistyped or your browser autofilled the incorrect address. If what was put on your application doesn’t match your credit report, pay stubs or other supporting documents, it can lead to a loan being denied. This is why it’s important to double check all of your information before submitting your application.
What to do if your loan application is denied.
If your loan application is denied you may want to take some time to review the details to ensure the information you submitted is correct and that there are no errors on your credit report. Getting denied for a loan isn’t a great feeling — but it can provide you with some useful information. In most cases, lenders are required to provide an adverse action notice, which is a written explanation of why your loan was denied. It’s one of the best ways to understand why your loan was denied.
Here are a few things you can do if your loan is denied:
Review your credit reports. Every 12 months you can request a free credit report from each of the three credit bureaus, Experian, Equifax and TransUnion. Review each of your reports and look out for errors, outdated information or anything that doesn’t belong to you. You can write to the credit bureaus to have inaccurate information removed, which can help improve your score.
Confirm your details are correct. Go back and make sure the information on your application was accurate. Make sure it’s consistent with your pay stubs and other supporting documents. Even small errors can cause an application to be denied.
Consider other options. There are other ways to get funds besides borrowing. Consider looking for a side gig or selling unused items. These can both be good ways to bridge short-term financial gaps. You may also want to consider asking your family or friends if they are in a position to help. While it can feel awkward, your support system is likely to be more flexible than a lender. Just be sure to keep communication open and honest, and stick to your repayment plan to avoid putting strain on your relationships.
Compare other lenders. Not all lenders have the same eligibility requirements. If one lender denies your application, another may be a better fit for your financial situation. There are lenders who consider your financial picture as a whole, instead of just your credit profile. Be aware that these types of lenders may have less favorable terms. Be sure to do your research before deciding to apply.
How to help improve your odds of approval.
If you want to strengthen your application before applying again, there are several steps that may be helpful. However, different lenders have different approval criteria, so there is never a guarantee that any single improvement will make the difference.
Work on your credit score. Improving your credit can be a journey. Making on-time payments and keeping your credit utilization low can help give you a boost. While there are a number of factors that go into calculating your credit score, payment history and utilization are typically two of the big ones.
Pay down debt. Paying down existing debt can help you improve your overall financial profile and make qualifying for a loan easier. There are many debt repayment strategies out there, two of the most popular ones are the debt snowball and the debt avalanche. However, finding the strategy that works for you is important and can help keep you on track.
Apply for a smaller loan amount. Applying for a smaller loan amount can help improve your odds of approval. A smaller loan amount can mean you’ll have smaller monthly payments that may fit more comfortably into your budget. If you were denied for a larger loan, consider whether a smaller loan could still meet your needs.
Get a cosigner. If you have a trusted person with good credit willing to co-sign, it may help you qualify. Just keep in mind that your cosigner takes on responsibility for the loan if you’re unable to repay — so it’s a decision worth talking through together.
Are there loan options available for those with bad credit?
There are loan options available for those with bad credit. Some lenders work with borrowers who have low credit scores and may look at other factors like income, employment history and your overall financial situation when considering loan approval.
You should be aware that these types of loans often come with higher annual percentage rates (APRs) and are often considered an expensive way to borrow. While they can be useful in an emergency, you should consider other options before applying.
Online personal loans. These personal loans provide an upfront lump sum of cash that can be repaid in smaller installments over a set period of time. They can be good for large, one-time expenses. Their payments are often predictable, making them easier to budget for.
Lines of credit. A personal line of credit is a type of revolving credit. Instead of a lump sum, approved borrowers are given a credit limit they can borrow from. As it’s repaid, the funds become available to borrow again. This makes it a flexible option that can be good for ongoing expenses.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
