Introduction
You are not alone if your request for a personal loan was turned down. Many Americans are experiencing financial hardship and are asking for assistance amid growing inflation and the potential for a recession.
Although the number of borrowers is smaller than in 2019, personal loan debt has climbed by 24 percent since 2021. Many people are having trouble qualifying even though personal loans are getting more popular and consumers are accruing more debt. There are various things you can do to increase your creditworthiness and your chances of being approved for a loan if you have been denied a personal loan.
Personal loan requirements
You must meet specific criteria in order to be approved for a personal loan. Lenders must determine your creditworthiness and possibility of repayment before deciding whether to lend to you and what conditions they’re ready to offer.
When examining applications for personal loans, lenders take into account a number of important aspects, such as:
- Collateral. While secured personal loans are less common, they tend to be a bit easier to get. Collateral for a personal loan can be any valuable asset. That item is typically used as collateral if you take the loan out specifically to pay for your home or car. Secured loans can be risky because you risk losing your asset if you default on the loan.
- Credit score and history. Your credit score is the most important indicator of loan eligibility. Credit scores range from 300 to 850. The higher your score is, the more likely you are to qualify for loan products. Your credit score depends on your borrowing history and how reliable you are about paying back your debts.
- Debt to income ratio. Your debt to income ratio is the percentage of your monthly income that currently goes toward paying off debt. Lenders use your DTI to predict the likelihood of you being able to pay back your loan. A DTI of 36 percent or less is considered good, but some lenders allow DTIs up to 50 percent.
- Income. Many lenders require borrowers to have a minimum annual income. Most lenders require at least some proof of income when you apply, even if they don’t have a minimum set.
| Credit score range | Average Annual percentage rate | Average loan amount |
|---|---|---|
| 720+ | 9.81% | $18,812.69 |
| 680-719 | 16.01% | $15,214.76 |
| 660-679 | 23.54% | $11,727.69 |
| 640-659 | 28.93% | $9,470.86 |
| 620-639 | 35.98% | $7,350.97 |
| 580-619 | 54.17% | $5,746.62 |
| 560-579 | 85.24% | $4,250.88 |
| Less than 560 | 135.83% | $2,817.03 |
People with higher credit ratings are more likely to get approved for loans with the lowest APRs and largest loan amounts, as shown in the table above. Basically, your chances of being approved for a loan with favorable terms increase as your credit improves.
Additional documents
There are various documents you need to have on hand before applying for a personal loan. You must first fill out a loan application. Each lender has their own application, and there may be different requirements. Basic personal and financial details, the amount you wish to borrow, and the purpose of the loan are typically required. Additionally, you will require documentation of your identification, income, and address.
Major Reasons personal loans are rejected
There are several reasons someone may have their loan application rejected:
- Bad credit history: Based on previous transactions, creditors may assume that you may be having problems repaying what you owe if you have a bad credit history. Lenders determine your creditworthiness by looking at your financial history in addition to your credit score, which is typically a good indicator of your credit history.
- High debt to income ratio: Your debt to income ratio is the ratio of your monthly income to your total monthly debt payments, represented as a percentage. Your DTI helps lenders assess your likelihood of repaying a loan. You may have too much debt for a lender to approve you for a new loan if your DTI is 50% or above.
- A missing document could be the reason your loan application is rejected. Check again that you provided the correct paperwork and a complete application if you receive a loan rejection letter.
- Lack of evidence of a reliable source of income: Consistency is important because it enables lenders to comprehend your future employment prospects. Lenders may review tax returns in order to gain a better understanding of the applicant because jobs can differ based on the industry.
- Loan is inappropriate for the purpose: Lenders may place limitations on what you can and cannot do with a loan. The lender might be able to make alternate recommendations that are better suited to your circumstances.
- Unsteady employment history: Lenders prefer to see a long-term stream of consistent revenue. If you have a history of inconsistent employment or are currently looking for work, lenders may assume that you won’t be a responsible borrower.
What to do if you are denied a loan
There are various things you can do to increase your chances of being approved for a personal loan the next time if your application is rejected.
You should first inquire as to the grounds for the denial of your application. If you request information about it within 60 days of the decision, lenders are required by the Equal Credit Opportunity Act to give you the reason they rejected your loan application. The key to taking action and improving your chances of being approved for your next loan is what is known as an adverse action notice.
Bad credit, a lack of credit history, fluctuating income, and high debt to income ratios are the main causes of personal loan application denials.
Review and build your credit score
Building your credit score is the most crucial thing you can do to improve your chances of being approved for a personal loan. Use a soft credit inquiry to see your score and credit history without hurting your credit if you want to see your credit score without a hard credit check. Make sure there are no mistakes as you review your report. If you did make your payments on time, make sure they are recorded as such and that there are no erroneous amounts.
There are various things you may do to improve your credit after reviewing your credit report and knowing your credit score. Keep credit card balances low and pay off all debts on time to prevent taking on additional debt. Adding yourself as an authorized user on someone else’s account is also possible. If the person has a superior payment history and a low use rate, this may be advantageous.
pay down other debts
Most lenders prefer borrowers with DTIs below 36 percent, however others may accept those with DTIs as high as 50 percent. Before requesting further credit, work on paying down your current debts if a high debt-to-income ratio prevents you from receiving a loan.
You can achieve this by reducing your monthly credit card spending and tightening your budget. It’s also a good idea to discuss debt reduction with a financial expert. By consolidating all of your debts into one, a debt consolidation loan may enable you to lower your monthly payments. The interest rate on this new loan should ideally be lower than what you were already paying.
Look for ways to increase your income
Your DTI might be decreased and lenders will find you more appealing if you have a greater income. Your chances of being approved for a loan may increase if you can find a way to augment your income. Think about requesting a raise at work, changing jobs, or obtaining a side hustle. When reapplying for a loan, include your full-time work and any additional household income.
Compare personal loans
Various lenders have different specifications, interest rates, terms, and costs. Before making an application to a particular lender, research lenders and compare rates. The appropriate lender for you will rely on your individual financial demands and situation. It’s a good idea to prequalify with a few lenders to determine your eligibility before applying. Banks, credit unions, and online lenders all offer personal loans. People with various incomes, credit ratings, and personal life schedules can choose from each choice.
Prepare for your next application and prequalify
Prequalify with a few lenders, if you can. Obtaining a preapproval indicates that you met the basic conditions, albeit it does not guarantee approval. You may prequalify with several lenders without having your credit score affected or making a commitment. Pre-approval, however, can be rejected if your income or credit score change.
Make sure your documentation is current to represent all the effort and modifications you made when you are ready to reapply. Try to find a cosigner if you are still unsure of your eligibility. This option is available to everyone, not only those who fall short of the standards. It can help anyone get a lower cost. However, a cosigner is liable for covering any late fees.
When to apply for a loan again after denial
Your credit score is affected every time you apply for a loan or any other sort of credit because the application appears as a credit inquiry on your credit report. It is wise to wait a little before reapplying because of this. Before reapplying, you should wait at least 30 days, although experts advise waiting six months to maximize your chances of being accepted.
Work on fixing the issue that led to your loan application being denied while you are holding off on reapplying. Pay off any debts you have, work on raising your credit score, increase your income if you can, and look into lenders with lenient qualifying conditions.
Conclusion
Even while being turned down for a loan might feel devastating, especially if you require money right now, there are many steps you can do to correct the situation and increase your chances of approval the following time.
There are loans for those with bad credit that typically have more lenient conditions if you need money right away and you can afford the higher interest rates. However, keep in mind that you must wait at least one month after being turned down for a loan before applying again, and that you should only accept a loan if you are certain you can afford the required monthly payments along with interest and fees.
To improve your chances of qualifying for a personal loan, you can best work down your existing debt and improve your credit score and debt-to-income ratio.