There are several reasons why you might be denied a personal loan, ranging from a lower credit score or income than required to incorrect information on your application. No doubt about it, though: Being denied for a denied personal loan can add stress to your life when you expect money to come through.
Follow this guide to understand why personal loans are rejected and how to help improve your approval odds in the future.
Why Was My Personal Loan Rejected?
Here are some common reasons financial institutions reject personal loan applications. Any one of these, or a combination of factors, could lead to a personal loan application being denied.
• Low income: Lenders may worry about your ability to repay a loan if your income is too low. However, most lenders don’t publish their requirements, nor do they always set specific cutoffs. In other words, it can be hard to know what earnings you need to show to secure a personal loan.
• Variable income: If you don’t always have a predictable income (as may be the case with entrepreneurs, freelancers, and seasonal workers), a lender might also have concerns about your ability to repay your loan.
• Unsteady work history: Another reason that lenders may feel you are not a good candidate for a personal loan is if you are in and out of the job market. For instance, a person who has been steadily employed at $60,000 per year could be perceived as more credit-worthy than someone who earned $100,000 for one year, was unemployed for six months, and then employed at $65,000 for nine months.
• Low credit score: Your credit score can be one of the most important factors on a personal loan application. A poor credit score (below 580) can mean you’ve had difficulty repaying your loans on time (or at all) in the past, so a lender may deny your personal loan application. (Or, if approved, you may wind up with a higher interest rate on your loan than someone with a stellar score.) You can see if a prospective lender shares what credit score you need for a personal loan before applying to save time and energy.
• High debt-to-income ratio: Your debt-to-income (DTI) ratio is the amount of debt you carry relative to your income. You can determine yours by adding up all your monthly debt payments and dividing that by your monthly income. Multiply that number by 100 to see if it comes in at no more than 43%, which many lenders use as a qualification. The lower your number, the better.
• Incorrect application information: Your application may include erroneous information, such as accidentally mixing up digits on an account number. This might be an easy fix when you reapply for your personal loan.
• Not meeting lender requirements: It’s a good idea to ensure you meet all lender requirements before you apply for a personal loan, which at the basic level include having U.S. citizenship or permanent residency, government-issued ID, a Social Security number or individual taxpayer identification number, proof of income, and being at least 18 years of age.
• Requested too much money: You may have requested more than the maximum amount your lender was willing to lend to you. They take into consideration the amount you can comfortably afford to repay based on your income and DTI.
• Incomplete application: You may get denied simply because you didn’t complete your paperwork when applying for a personal loan. If so, next time around, consider going over your application extra carefully.
• Loan purpose didn’t match lender criteria: Lenders often impose restrictions on how you use your loan. If you intend to use a personal loan as a student loan, for example, the lender may have restrictions against that and deny your loan application.
By the way, it’s worth noting that even if you were preapproved for a personal loan, you might still ultimately be denied. Here’s why: The preapproval process may not give your lender the full information they need to definitively approve the loan.
Recommended: Personal Loan Guide for Beginners
What to Do After You’ve Been Rejected for a Loan
If your personal loan application has been rejected, the lender must share what’s known as an adverse action notice, which reveals which information was used to make this decision. This can point you in the right direction about what may have triggered the denial and help guide you toward getting a personal loan in the future.
You might also check with your lender directly to find out why. If the rejection was due to an error on your application, you could potentially apply again and correct that mistake. (Check with your lender about any waiting period before reapplying.)
Can You Improve Your Loan Approval Chances?
If you were rejected for a personal loan, here are some ways you can improve the odds of being approved in the future.
Finding a Cosigner
Your lender may suggest you reapply within a short period of time with a cosigner. This would be someone with good credit who agrees to take ownership of the loan if you can’t repay it in full yourself. Keep in mind just what a big commitment this is for a cosigner: They must agree to be responsible for the debt if you default.
Checking Your Credit Report
Your credit report is a statement that contains information about your credit activity and reflects how well you’ve handled debt in the past. However, your credit report may contain erroneous information about your identity, account errors, debt duplication, and more.
You can get a free annual copy of your credit report from each of the three credit bureaus at AnnualCreditReport.com, by calling 877-322-8228, or via mail at Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. If you do find any mistakes, you can dispute them and potentially build your credit score.
Building Your Credit
If your credit score wasn’t high enough to qualify for a personal loan, you may want to check your lender’s requirements and reapply when you have a better credit score. There are several ways to build your credit:
• Be meticulous about paying your bills on time.
• Don’t apply for too many loans or credit lines in a short period of time.
• Keep your DTI at no more than 43%, preferably lower.
• Maintain credit accounts in good standing; length of credit history counts toward building your score.
• Aim for a good credit mix. Having installment loans, say, as well as credit cards can help build your score.
Recommended: What Credit Score Do You Need for a Personal Loan?
When to Reapply for a Personal Loan
How soon you can reapply for a personal loan may vary depending on your lender and the reason why you were rejected. Some lenders may allow you to quickly reapply if you bring a cosigner on board, as noted above. Others may require you to wait up to 90 days before you apply again for a personal loan. Also, you may need to wait a period of time to, say, build your credit score to bring it in line with what a lender requires. That could take months.
Your lender can likely give you some suggestions about whether it makes sense to reapply quickly or wait a while.
Alternatives to Personal Loans
If you can’t get approved for a personal loan, here are some other funding sources to consider.
• Credit cards: Credit cards are a definite alternative to personal loans, but if you don’t pay off your monthly balance, the interest rates are higher for these than personal loans. That could lead to you having significant credit card debt. Credit cards also work differently than personal loans; what you owe is based on the amount of credit you use and the interest charged, versus how a lump-sum personal loan is paid back.
• Home equity loan: A home equity loan differs from a personal loan because you use your home equity (the difference between the home’s value and what’s owed on the mortgage) to secure the loan. This is critical to note: If you stop making payments, the lender can seize your home. In terms of how it works, you’ll receive the money in one lump sum and pay back principal plus interest monthly over the term of the loan.
• Home equity line of credit (HELOC): A HELOC, just like a home equity loan, is secured by your home. However, it works like a credit card, allowing you to draw on your loan as much as you want through a withdrawal period. After that period, a HELOC enters the repayment phase.
• Cash-out refinance: A cash-out refinance is a type of mortgage refinance that allows you to borrow more than you currently owe. You can take that difference in cash. Again, as with a home equity loan or HELOC, your property will serve as collateral. If you can’t make the payments, you could lose your home.
• Peer-to-peer loan: These loans, which bypass traditional lenders, are also called “crowdfunding loans” or “social lending loans.” They differ from loans from financial institutions because multiple investors fund them. Peer-to-peer loans may offer an alternative to individuals who can’t get loans from traditional lenders. Some peer-to-peer lenders include Prosper and Upstart.
As you consider these options, it’s important to shop around and compare interest rates and repayment terms before you make a decision.
Recommended: Personal Loan Requirements to Get Approved
The Takeaway
If you’re denied for personal loans, it could be due to low or variable income, your credit score, or other factors. It’s important to consider your options, whether reapplying or finding an alternate source of funding, so you can find the best fit for your finances.
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FAQ
Why do I keep getting denied for a small loan?
The reasons for a personal loan denial can vary. Low income, a poor credit score, and other factors may be to blame. Often, however, you can gain insight about why your application was not approved and then work to secure funding in the future. If you are applying often for various forms of credit, that could be one reason why lenders are wary.
How can I get a loan when I can’t get approved?
If you’ve been turned down for a personal loan, you might be able to bring on a cosigner and get approved. Or you could consider waiting and applying for a personal loan with a stronger application package. You can also seek a different form of funding, such as a home equity loan or a peer-to-peer loan.
How hard is it to get a $30,000 personal loan?
You may qualify for a $30,000 personal loan if you meet the requirements, which often include having a credit score of at least 580 to qualify and above 700 for more favorable terms.
Photo credit: iStock/Milan Markovic
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