You just got denied a personal loan, and you are worried you may not be able to get the funding you needed. Well, the good news is that you still have a chance to reapply for a personal loan, even if you have been denied before.
However, before going through the process, it is very important to understand the reasons your personal loan application was denied in the first place.
This will help you know the steps you can take to address those problems. Once you have solved the reasons, you have more chances to get your loan application approved in the future.
7 Reasons Your Personal Loan Application Was Denied
Just as I have mentioned above, if your personal loan application was denied, it’s essential to understand why so you can improve your chances next time. Each lender has unique criteria for approving loans, so the reasons for rejection can vary.
The good news is that when your application is denied, the lender is required to give you a notice explaining the reasons behind their decision.
This can give you good knowledge into what factors played a role. Here are some typical reasons why a loan application might not get approved.
1. Low credit score
Your credit score is a key factor that lenders look at when deciding if you’re a good candidate for a personal loan. A low credit score could be one of the reasons why your personal loan application was denied.
This score is based on things like your payment history, how much of your credit you’re using, and how long you’ve had credit. Generally, the higher your score, the more reliable you appear to lenders.
Because personal loans usually aren’t backed by collateral, your credit score becomes even more crucial in the approval process.
If your score doesn’t meet a lender’s minimum requirement, your chances of getting approved are slim. And even if you do qualify, you might face higher interest rates compared to those with better scores.
Before applying for a loan, it is advisable that you check what credit score a lender requires.
To improve your chances, aim to exceed that minimum. If your score falls short, consider exploring other lenders or different financing options.
2. Low income
Not all lenders set a minimum income requirement, but your income can still play a big role in whether you get approved for a loan.
Lenders want to see that you earn enough to cover the payments and eventually pay off what you borrow, along with the interest.
If your income is too low, the lender might be concerned that you won’t be able to keep up with the payments and could default on the loan.
3. Debt-to-income ratio is too high
Your debt-to-income ratio (DTI) shows lenders how much of your income is already going toward debt payments.
To figure out your DTI, divide your total monthly debt payments by your monthly income, then multiply by 100 to get the percentage.
To improve your DTI, you can either increase your income or pay down your debt. Start by reviewing your budget to find areas where you can cut back and use those savings to pay off debt. Look into different strategies, like the snowball or avalanche method, to help you pay down debt more efficiently.
4. Incomplete application
Rushing through a loan application can lead to mistakes like leaving out important details or forgetting to include required documents like pay stubs.
If your application is incomplete, it will likely be rejected automatically. Lenders need all the necessary information to properly evaluate your request.
Next time, take your time to fill out the application carefully. Double-check everything before you submit, and make sure you have all the required documents ready ahead of time.
5. You tried to borrow too much
Lenders assess your financial situation to decide the maximum amount you can borrow. This is based on what they believe you can comfortably repay each month, considering your income and existing debts.
If you ask for a loan that’s more than you can realistically handle, your application might be denied. Instead of aiming for a large amount, it’s smarter to request a loan that aligns with your financial reality.
6. You didn’t meet the lender application requirements
Most lenders have basic requirements you’ll need to meet to be eligible for a loan, beyond just financial criteria. While each lender might have slightly different rules, generally, you’ll need to:
- Be at least 18 years old.
- Be a U.S. citizen or a qualified resident.
- Have a permanent address and a bank account.
- Have a working email address.
If you don’t meet these basic requirements before applying, your loan application will likely be rejected.
7. Mistakes during application
Each lender has its own set of application rules, and missing a requirement can lead to rejection.
For example, if you forget to upload bank statements or enter incorrect details, your application might be denied. Before you submit, double-check all the fields and make sure you’ve included all the necessary documents.
Ways to Boost Your Chances of Getting a Personal Loan
- Pre-qualify: Pre-qualifying helps you see if you’re likely to be approved before you officially apply. You’ll get an estimate of your loan amount, interest rate, and monthly payment. This process involves a soft credit check, which doesn’t impact your credit score, allowing you to compare offers from different lenders. Since each lender has its own criteria, you might qualify with one lender even if you don’t with another.
- Add a co-signer: Including a co-signer with good credit and income can improve your chances of approval. The lender will consider both your and your co-signers financial details. Just be aware that your co-signer will be responsible for the loan if you can’t pay it back.
- Use Collateral: Securing your loan with collateral, like a car or savings account, can make it easier to get approved. With collateral, lenders face less risk because they can claim the collateral if you default on the loan.
How Long Should I Wait for Before Reapplying for a Personal Loan?
If your personal loan application is denied, it might not be wise to reapply right away, depending on why you were turned down. For example, if the issue was something minor, like a typo, you should contact the lender to correct it right away.
If you need to improve your credit, reduce your debt, or boost your income, it’s best to wait at least a month, though a few months is often better. Credit updates take time, and changes to your score might not be immediate.
Each loan application will require you to go through a hard check, and this can temporarily lower your score. Applying too frequently in a short span might make you look risky to future lenders.
