Getting rejected for a personal loan can feel discouraging. However, by taking the necessary steps to improve yourself as a loan candidate, you might be able to get approved in the future. Here are five reasons why personal loans often get rejected, and techniques to help you up your approval chances.
5 reasons why personal loan applicants get rejected
1. Not enough income
If your income isn’t enough to cover the monthly payments, there’s a good chance you’ll be rejected. Lenders look for a demonstrated ability to pay, and some loans might have minimum salary requirements.
Debt can hurt your chance of getting approved. Debt from a credit card or pre-existing loan can make you appear like a risky borrower to lenders. Having debt will give you a high debt-to-income (DTI) ratio. Your DTI is a comparison of monthly payments divided by monthly income. Most lenders use your DTI as an indication that you’ll be able to make your payments. If your payments are significantly higher than the amount you make, you’ll probably get turned down.
3. Bad credit history
If your credit history is poor, lenders will likely view you as an unreliable borrowing candidate. Issues like defaulted loans or numerous late payments will make it more difficult for you to get approved.
4. Incorrect or missing information
Since all of the information in your application needs to be verified by the lender, missing or incorrect information can cause you to be rejected. For example, even if you do make enough money to pay your loan, you could still be turned down if the lender can’t verify your income.
5. Lack of a stable job
Lenders care a lot about your job stability, and most will be looking for a stable job status. Lenders view stable employment as an indication you’ll be able to make enough money to pay on time. If you’ve had the same job for several years, this shouldn’t be a problem. But if your job history is more sporadic, it could potentially lower your approval odds.
How to get a personal loan approved
If your loan application is turned down, don’t wallow in despair. These tips can help you get approved the next time around:
- Ask why: If you’re denied, make sure to ask your lender the reason why. Under the Equal Credit Opportunity Act, lenders must tell you the exact reasons why you were denied. Once you know the rationale behind your rejection, you’ll know what you need to improve.
- Improve your credit: One of the most common reasons for rejection is a poor credit score. Your credit score is based off the following:
· Payment history (35%)
· Amounts owed (30%)
· Length of credit history (15%)
· New credit (10%)
· Credit mix (10%)
Payment history, or your track record of making payments on-time, makes up the biggest portion of your score. By paying on time, and decreasing your debt (amounts owed), you’ll be on your way to improving your score.
- Boost income: Since some lenders have a minimum income requirement, increasing your income can also increase the likelihood of getting approved. Making more money will also decrease your DTI, thereby helping you qualify. You may want to consider getting a side hustle to help make a little extra each month.
- Check your credit report: Make sure to check your credit reports at the three major credit bureaus (Equifax, Experian, TransUnion) to look for any errors that may negatively affect your score. You can receive a free yearly credit report check at annualcreditreport.com. For example, payments that are incorrectly reported as being late could cause a significant drop in your score. If you find an error, reach out to the credit bureau immediately to have the mistake rectified.
- Do your prep work: Make sure to gather all necessary documents and information ahead of time. This will make it easier for lenders to verify your application and make the process much smoother.
- Double-check your application: Since missing or incorrect information on your application can cause your loan to be denied, take the extra time to double-check your details to ensure that you don’t get denied for a simple mistake.
- Research lenders: Take time to compare personal loan rates and lenders. For example, while online tenders typically favor borrowers with good credit scores or better, credit unions sometimes offer loans to individuals with bad or poor scores.