When you apply for a personal loan, there's a chance that you might be declined. Should this happen to you, it's important to understand why a lender may make that decision. That way, you can figure out a plan to re-apply for a personal loan and have a better chance of getting approved.
Key Takeaways
- One common reason you would be declined for a personal loan is a poor credit history.
- Income and the amount of debt you already have can also be reasons a lender may reject your loan application.
- You can improve your chances of getting approved by increasing your credit score, getting a co-signer, or providing collateral.
5 Reasons Why Personal Loans May Be Declined
When a lender declines your personal loan application based on information from a consumer credit report, they have to tell you the reason. 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.
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 take into account your monthly income compared to the total amount of your monthly debt payments.
For example, if your monthly debt bills include $1,000 for your mortgage, $450 for an auto loan, and other debt payments (such as credit card minimum payments) totaling $300, your overall debt payments are $1,750. If your monthly gross income is $4,000 per month, you divide your debt payments by your income to get a DTI of approximately 44%. That means that 44% of your income each month goes toward your debt.
Lenders typically prefer to see a DTI of 35% to 40% or lower for personal loan applications. So, while lenders can always make exceptions to this general rule if they so choose, there's a chance that a high DTI could lead to being declined for a personal loan, even if you have good credit.
Low Income
Another concern is that you might not have enough money to repay the loan. The lender might look at the amount of your loan and potential monthly payments, and they may decide that your income isn't large enough to handle it.
Even if you don't have a high DTI, concerns about your ability to handle loan payments on a low income can influence your ability to receive approval for a loan.
Unstable Employment or Source of Income
Because personal lenders are interested in receiving regular payments for the loan, they are also interested in making sure that your income is relatively stable.
If you haven't had a job for a long period of time, or if your employment history is spotty, a lender might be reluctant to provide you with a loan. After looking at pay stubs and tax returns, a lender might decide your income isn't consistent enough for you to make regular payments.
Failure to Meet Basic Requirements
Every lender has its own criteria for providing funds for loans. Some basic requirements that lenders may have include:
- U.S. citizenship or some type of residency
- Being a certain age, such as 18, 19, or 21
- Having a bank account
There might be other requirements, such as being employed or providing proof of assets. If you don't meet those basic requirements, your personal loan might be declined. Before applying for a personal loan, make sure you understand the lender's requirements.
What to Do if Your Personal Loan Was Declined
If you receive notice that your personal loan application was declined, there are some steps you can take to learn more about the situation and potentially find better success:
- Talk to your lender: Start by finding out why your loan was declined. That information can give you a foundation for a more successful application later on. Additionally, you might be able to explain an extenuating circ*mstance and get the lender to reconsider.
- Find a different lender: Each lender has its own criteria, so you might be able to get a loan elsewhere. If your credit score is too low for one lender, you might be able to secure funding from a different lender that specializes in bad credit personal loans.
- Offer collateral: Not all personal lenders accept collateral, but some do. You might be able to offer an asset as security for the loan, prompting the lender to give you another chance.
- Provide additional documentation: Depending on the situation, you might be able to have your application reconsidered if you can provide more documentation related to your income and its stability.
Backing up your application with extra tax returns, additional proof of income or assets, and other paperwork might show that you're capable of repaying the loan.
How to Improve Your Chances of Getting a Personal Loan
Even if you don't get a personal loan this time, you might be able to improve the odds that you'll get a personal loan in the future. 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 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.
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?
In general, 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?
Every lender has its own criteria for personal loans, including the credit score you need. In general, you usually need a credit score at least in the 600s to get approved. However, some lenders will provide a loan even with a score below 600, although the interest rate might be very high.
The Bottom Line
Lenders have the ultimate decision-making power when it comes to who they will provide loans to. In general, though, if you're denied a personal loan, it most likely has to do with your credit score, income situation, or DTI. Before you apply, check the lender's criteria to determine if you're likely to qualify.
