When you apply for a personal loan, there’s a chance that you might be declined. Five of the most common reasons that might prevent you from getting approved for a personal loan include:
1. A poor credit history or low credit score 2. Low income 3. A high debt-to-income ratio (DTI) 4. An unstable work history 5. An inability to meet basic requirements, such as having a bank account If you get denied when applying for credit, look for ways to increase your chances of approval by boosting your credit score, getting a co-signer, or providing collateral. Key Takeaways: – A poor credit history or low credit score can prevent you from getting approved for a personal loan. – Too much monthly debt relative to your income—your debt-to-income ratio (DTI)—can lead to a lender rejecting your loan application. – Low income and an unstable employment history can also prevent you from getting approved for a personal loan. – Failure to meet basic requirements like having a bank account can also hinder your chances of getting approved for a loan. – Ways to increase your chances of a loan approval include boosting your credit score, getting a co-signer, or providing collateral. When a lender declines your personal loan application based on information from a consumer credit report, they must tell you why. Understanding the cause of your application being declined can help you change your behaviors and improve your chances of securing a loan in the future. Low Credit Score: Your credit score is often used to make decisions about loans because it’s considered a measure of the likelihood that you’ll repay a debt. Your credit score is a three-digit number that reflects your creditworthiness and ability to repay your debts. Your credit score is calculated based on the information in your credit report. If you have a poor credit score, a lender might decide providing you with a loan is too big of a risk. They may assume you won’t repay the loan, or your missed payments might result in the need to attempt to collect from you. High Debt-to-Income Ratio: Another consideration is whether or not you have a lot of debt relative to your income. When determining your debt-to-income (DTI) ratio, lenders consider your monthly income compared to the total amount of your monthly debt payments. For example, let’s say that you earn $4,000 per month in gross income—or your income before taxes and deductions are taken out of your paycheck. You have the following monthly payments: – Mortgage payment: $1,000 – Auto loan: $450 – Credit cards: $300 for all of the minimum monthly payments To calculate your debt-to-income ratio, total your monthly debt payments and divide the result by your gross monthly income as follows: Your total debt payments = $1,750 or ($1,000 + $450 + $300) Monthly income: $4,000 Debt-to-income ratio: 44% or ($1,750 ÷ $4,000) * 100 In other words, 44% of your monthly income goes toward your debt. We multiplied the result in the DTI calculation of .44 by 100 to convert the decimal into a percentage.Lenders typically prefer a DTI of 35% to 40% or lower for personal loan applications. While lenders can make exceptions, a high DTI could lead to being declined for a personal loan, even with good credit.
Low Income is another concern. Lenders may decide your income isn’t high enough to handle the loan payments, impacting approval odds. Even without a high DTI, low income can raise concerns about repayment ability. Unstable Employment or Source of Income is also a factor. Lenders prefer steady income for consistent payments. An unstable employment history or extended unemployment may lead to reluctance in approval. Failure to Meet Basic Requirements can result in rejection. Common requirements include U.S. citizenship or residency, minimum age (18, 19, or 21), and a bank account. Additional requirements like employment proof or asset documentation may apply. What to Do if Your Personal Loan Was Declined: – Talk to your lender: Understand the reason for decline and potentially request reconsideration. – Find a different lender: Criteria vary, and another lender may approve your application. – Offer collateral: Some lenders accept assets as security for the loan. – Provide additional documentation: Extra proof of income or assets may strengthen your application. How to Improve Your Chances of Getting a Personal Loan: Even if declined now, you can take steps to improve future approval odds by addressing the issues mentioned above.Here are some steps you can take to boost your chances of securing a personal loan:
Improve your credit score: Because lenders rely so heavily on credit history to make decisions, taking steps to increase your credit score can help. Make on-time payments, reduce the amount of debt you have, and make an effort to ensure that your credit score reflects your ability to make payments. Get a co-signer: If someone is willing to take on responsibility for your debt, you might be able to qualify for a personal loan, even if your own credit score is poor. In general, a co-signer should be someone with good credit and a stable income. Use collateral: You can often use collateral like a car, home, or bank account as security for a loan. However, you risk losing the valuable asset if you don’t make payments. Legitimate lenders can charge a loan origination fee for reviewing your credit application and credit history. However, be aware of advance-fee loan scams from companies that promise you guaranteed approval no matter your income or credit history, but you must pay an upfront fee. How Soon Can You Apply for a Loan After Being Declined? In many cases, it makes sense to wait at least 30 days before applying again. This gives you time to address the reason your personal loan was declined. You may want to wait even longer if you have major financial improvements to make to qualify for the loan. How Long Does a Declined Loan Stay on Your Credit Report? You can expect a hard inquiry to remain on your credit report for two years, although the impact on your score will be minimal from one loan application. If the lender only performed a soft inquiry, your credit score won’t be affected. Why Can’t I Get a Loan if I Have Good Credit? Even if you have good credit, other factors, such as your debt-to-income ratio and income, might be impacting your ability to get a loan. If your total debt payments are already high, a lender may find it risky to provide you with even more debt. Similarly, if your income is too low, the lender may feel you are at a higher risk of not repaying a loan. What Credit Score Do You Need for a Personal Loan? There is no widely accepted minimum credit score since each lender has its own criteria for personal loans. Typically, you need a credit score in the 600s to get approved. However, some lenders approve loans for borrowers with lower scores, but the interest rate might be very high. The Bottom Line Although there are various reasons for getting denied when applying for a personal loan, five of those reasons include a low credit score, low income, a high debt-to-income ratio (DTI), an unstable work history, or an inability to meet basic requirements. Before applying for a personal, check the lender’s criteria to determine if you will qualify.
