Being denied a personal loan can be disheartening. You may worry you won’t get the cash you need and be unsure of where to turn next. However, it’s important to remember that this isn’t the end of the road. You can reapply.
Before you do, though. It’s important to understand the reasons behind the denial. When you know why the lender said no, you can take steps to fix the issues and increase your chances of approval in the future.
Let’s go over what you can do so that you can get beyond rejection and find the money you need.
Possible Reasons Why You Were Denied
Understanding why you were denied is the first step to fixing the issues. Lenders have to send an adverse action notice that explains their decision. Take the time to read it and see what you need to address. Here are the most common reasons for declined applications.
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Basic Requirements Not Met
Lenders have specific criteria you must meet to qualify for a personal loan. Common basic requirements include:
If you fall short in any of these basic requirements, your application may be rejected outright. It’s crucial to review the lender’s prerequisites carefully before applying to ensure you meet the minimum qualifications.
Poor Credit
Your credit score is a pivotal factor in loan approval decisions. A low credit score can signal to lenders that you’re a high-risk borrower, which might lead to a denial. Many lenders require you to have a credit score of at least 640. Check their minimum credit score requirements and make sure you meet them before you apply.
High Debt-to-Income Ratio
Lenders want to know that you can afford to make monthly payments on top of your existing debts. To assess this they look at your debt-to-income (DTI) ratio. A high DTI ratio suggests that you may have difficulty handling additional debt, making you a less attractive candidate. Keep your DTI below 35% for the best approval chances.
Low Income
How much you make matters even if the lender does not state a minimum income requirement. The lender still wants to know that you can afford to repay the loan. Be sure to include all forms of income on your application: child support, alimony, disability, social security, and so on.
Application Mistakes
Errors or inconsistencies in your loan application, such as mistyped information or incomplete sections, can lead to a denial. These mistakes might raise concerns about your attention to detail or even your honesty, affecting the lender’s trust in your ability to manage the loan. Review your application carefully and make sure you uploaded the correct documents.
Boost Your Credit Score
Before submitting another loan application, take steps to enhance your appeal to lenders and increase your chances of approval.
Find a co-signer with a strong credit profile. A co-signer provides lenders with additional assurance since they will take over the loan if you default. This security net can make lenders more inclined to approve your loan and offer better terms.
Thoroughly review your credit report for any errors or areas for improvement. Disputing inaccuracies can positively impact your credit score.
Pay down existing debt to lower your debt-to-income ratio. This demonstrates to lenders that you are responsible and puts you in a much better position when you reapply.
Be cautious about submitting too many applications in a short period. Each application results in a hard inquiry which can impact your credit score reducing your chances of securing a loan.
Improve Your Chances
There are a number of ways you can improve your chances of qualifying for a loan.
Alternative Loan Options
When traditional personal loans are not an option or you can’t wait while you build credit, exploring alternatives can provide the financial support you need.
Borrow from friends and family
Ask if someone you’re close with can lend you the money. They likely won’t charge interest and you can work out a flexible repayment plan. Always get the agreement in writing and approach it professionally to preserve relationships.
Seek Peer-to-peer (P2P) lending
These platforms connect borrowers directly with individual lenders. Often, the lenders offer competitive rates and terms, especially for borrowers with less-than-perfect credit scores. It’s important to research and compare different P2P lenders to find the best match for your financial situation.
Find Online lenders
Lots of lenders have moved online and specialize in bad credit loans. While the interest rates and fees may be higher, you also may be able to get the money you need the same day.
Join a credit union
Credit unions offer loans to their members which usually come with more lenient requirements and lower rates than big banks. Ask your local credit union what they have to offer.
Frequently Asked Questions
Bottom Line
Being denied a personal loan is not the end. It is simply a set back forcing you to examine your financial situation and take steps to improve it.
Build your credit, pay down your debt, find a co-signer, and increase your income. All these steps will make you a more attractive candidate and increase your likelihood of being approved next time around.