Most people don’t apply for personal loans unless they need the money. So, when your application gets denied, it’s easy to take it personally. The time you spent organizing your paystubs, and bank statements may suddenly feel like a waste. If your loan application has been denied, take a deep breath. Know that you’re not alone.
LendEDU found that a staggering 76.12% of personal loan applicants get rejected. If anything, being rejected is the norm. That’s why it’s so important to put your best foot forward.
Banks and other traditional lending institutions maintain strict criteria for the people they approve for loans. If they feel that you don’t make the cut, you could be denied for any number of reasons. Understanding what they look for and updating your profile accordingly can improve your odds of getting approved for a loan in the future. Keep reading to learn about five of the most common reasons why personal loan applications are rejected.
Lenders scour your financial profile for evidence that you’re a good borrower. Many banks have a credit threshold every applicant must meet, and a bad or nonexistent credit history can prevent you from meeting their criteria. Some red flags lenders will look for in your credit report include:
Not making payments on time
If you just started to build your credit, you simply may not have sufficient credit history. Lenders refer to these borrowers as having “thin credit.” With some lenders, little to no credit history is just as bad as poor credit because you have no proof of your creditworthiness. If you suspect that your loan application was denied because of your credit history, work on improving your profile.
Keep in mind, if you are rejected, it might be beneficial to look for a lender that specializes in your credit level.
Maybe your end goal is to get a mortgage for a new home. If your credit history is thin, you can start by opening up a new credit card with a small limit. Prove your creditworthiness by making your monthly payments on time for several months or years. As your credit builds, you can then apply for an auto loan and, finally, your mortgage. Building up a loan history that you consistently pay off proves to lenders that you’re capable of managing your money carefully and can be trusted with even bigger loans.
If you believe your credit history is preventing you from getting a personal loan, and you are unsuccessful in finding a lender that focuses on working with your specific credit situation, you may want to consider finding a co-signer. This would be someone with better credit than you who promises to pay for the loan if you cannot. A co-signer typically improves your chances of loan approval.
Whether you’re looking for a co-signer or applying for a loan with your spouse, be aware that your partner’s credit will certainly affect your odds of approval. It’s not enough that you might have great credit. If your partner’s credit is less than stellar, lenders will harbor doubts so long as you are applying for the loan together.
Think about it this way: When roommates or couples apply for a new apartment, the landlord will check the credit of anyone signing for the lease. Lenders do the same thing to lower their risk. It’s best to know the credit details of anyone that you plan to enter into a contract with before you apply. If the person is someone you know and trust, you may be better to leave them off the application if you can meet income requirements on your own.
Lenders won’t just look at your past borrowing habits, they may try to assess your future spending, too. They’re also very interested in how much money you make. Is the loan you’re applying for proportional to your current salary? Will you really be able to make your monthly payments on time? By looking at your work income, other streams of income, and debts, lenders attempt to answer these questions. And they’ll approve or deny you accordingly.
For instance, you could have a much harder time getting approved if you recently lost your job or started a new one. If you’re self-employed, you may need to supply additional information (like long-term work contracts) to prove that you can make your monthly payments without issue.
Lenders decide whether or not you can take on a loan by looking at your debt-to-income (DTI) ratio. They can deny your application if your current debt outweighs your ability to pay. Maybe you’ve taken out too many loans or perhaps you’ve maxed out all of your credit cards. If you’ve recently taken on new debt or are already paying back a sizable loan, lenders may hesitate to give you more. They’ll worry that you won’t have the means to pay because you already have other financial obligations.
Most lenders use your DTI to compare the amount you spend paying down your debt each month to your monthly income. One way to calculate your DTI ratio is to divide your monthly debt payment by how much you make each month. But you should know that lenders calculate DTI in various ways.
Finally, lenders can deny your application if the information you provide doesn’t match the details they have on file. Any inconsistencies could be grounds for denial. You’re borrowing money from them, after all, and they want to lower their risk profile as much as possible. Keep in mind that lenders have the resources to verify your information on their own. Any mistakes or purposeful misrepresentation of information will eventually be discovered, so it’s best not to lie on your application at all.
Before you apply for a loan, take a look at your credit report to ensure that all your information is correct and up to date, especially if you moved recently. Also, make sure to proofread your application before submitting it.
With this in mind, take some time to review your financial profile and fix any issues in your credit report before you visit your lender again. You may even want to consider applying for a smaller loan amount that you are confident you will be approved for. Regardless of the situation, make it a habit to review your credit reports at least once every year. When you do, you reduce the chances of getting surprised by unexpected issues in the future.
While the above holds true for most traditional lenders, there are alternatives out there. For example, Personify has successfully helped thousands of people with less than perfect, or little credit history, get the loans they need. We designed our application process to look for opportunities to approve you. So even if you’ve had trouble getting approved in the past, we may still be able to help.