Why was your loan rejected? There could be several reasons why they reject your applications.
It might be due to your low credit score, lack of collateral, or insufficient income. Whatever the reason may be, there are ways to recover from a personal loan rejection.
In this article, we’ll discuss all 7 reasons why your loan was rejected and how to recover from it.
- Why might you have been turned down for a personal loan?
- 5 Steps to recover from personal loan rejection
- Frequently Asked Questions
Why might you have been turned down for a personal loan?
The reasons for being turned down for a personal loan include having a high debt-to-income ratio and requesting to borrow too much money, in addition to having a bad credit score.
Even if one lender refuses to lend you money, don’t give up hope.
You may always try applying with another if one lender refuses your loan application. Each lender has its own set of standards for lending.
Take some time to figure out how to get a personal loan approved if your request for one is repeatedly denied. And, by learning how to improve your credit score and debt-to-income ratio, you may save money on interest.
If you’re unsure why you were turned down for a personal loan, contact the lender.
And these 7 reasons why your loan was rejected are:
1. Your debt-to-income ratio is excessively high
The debt-to-income ratio is a metric used by lenders to evaluate your credit risk.
It’s the proportion of your gross monthly income that goes toward paying your monthly debt installments.
If your debt-to-income ratio is 15%, this indicates that each month, 15% of your monthly gross earnings go toward debt repayments.
A high DTI ratio, on the other hand, can indicate that a person has too much debt for his or her earnings each month.
Because of this, a reasonable goal is to aim for a DTI ratio of 35% or less, which is regarded as acceptable. As a result, you’ll have a better chance of receiving funding.
Increasing your income or lowering your debt may help you reduce your debt-to-income ratio. If you do both at the same time, you’ll see better results much more rapidly.
It isn’t easy, and quick, to raise your salary. There are alternative methods to pay down debt that you may try.
You could, for example, try the debt snowball repayment strategy.
The debt snowball technique is to pay off your smallest debt first before working your way up the scale.
You may also use the debt avalanche approach, in which you pay off your debts with the highest interest rate first before continuing to pay down your obligations in order of interest rate.
Although paying off debt using an avalanche approach might help you save money on interest, a debt snowball may keep you motivated over time by providing regular, little victories.
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2. You have a poor credit score
One of the main reasons lenders reject personal loan applications is because the borrower has a low credit score.
A credit score is a measure of how risky it is to lend money to a person. If you have a low credit score, it means you’re more likely to default.
Because personal loans are typically unsecured and lack collateral to secure them, lending criteria are generally more stringent.
Lenders generally publish their low credit requirements.
If the minimum requirements are not met, you will most likely be unable to obtain a loan from that lender.
Lenders might charge you a higher interest rate to offset the danger that you won’t be able to pay it back, even if you have a terrible credit history and are accepted for a loan.
Here are 4 things you may do right away to raise your credit score:
- Get a copy of your credit report, and if there are any problems, dispute them.
- To avoid missed or late payments, set up automatic bill pay.
- To lower your credit utilization, pay down your credit card debt.
- Seek nonprofit credit counseling if you need help managing your debt, whether it’s current or past due.
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3. You attempted to borrow far more cash than you should have
If you apply for a personal loan and declare that you can only pay back a certain amount, the lender may refuse your request.
Because your income and other debt obligations influence the amount the lender allows, this is why.
The lender may determine that you do not qualify to borrow a specific amount after examining your finances.
Let’s assume you apply for a personal loan of $100,000, knowing that you don’t earn enough money to pay the monthly payment.
Because you are asking for an unreasonable quantity, the lender is certain to refuse you.
The solution to this issue is to seek a lower loan amount.
Make a list of the things you want to do, and calculate how much money you’ll have leftover in your budget each month after paying off your personal loan.
By doing this, you’ll have a better chance of being accepted.
Furthermore, by borrowing more than you can afford, you won’t put yourself in a position to default on your repayments.
4. Job Instability
When it comes to giving you a loan, job stability is highly valued.
Switching jobs frequently or performing freelance work that is subject to change might lead to your loan request being denied.
Job security is having a job that you know you won’t lose any time soon, and for some people, the sense of calm is worth more than money.
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5. Not Eligible
Your age, citizenship, and even education level can all influence whether or not you qualify for personal loans.
These are some of the reasons why your loan application might be denied.
5 Steps to recover from personal loan rejection
Use the rejection as inspiration to improve your credit and earn more money so you can get approval the next time you apply, rather than taking it personally.
Here’s how to recover if you’re rejected for a personal loan:
Step 1: Ask why was your loan application turned down
According to the Equal Credit Opportunity Act, In the case of a refusal, lenders must provide a detailed explanation. If a lender does not volunteer this information, you have 60 days to request it.
On an application, two things that lenders look at are your credit score and salary.
Your credit report may contain too many missed payments or a history that is insufficient.
Your debt-to-income ratio, the percentage of each month’s income used to pay off debt, maybe too high.
After you’ve figured out why you were turned down, you may start planning for the next time.
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Step 2: Get a credit report and establish a good credit
Regular payments on all of your debts and keeping credit account balances low are two methods to improve your credit, but they aren’t the end.
Check your credit report for mistakes. The following are just a few of the most prevalent credit reporting anomalies:
Payments are recorded as late or in default, and accounts show the incorrect balance.
From AnnualCreditReport, get copies of your credit reports from the three main credit bureaus.
You could get a credit card with a deposit: A secured credit card requires a cash deposit that is usually equal to the credit limit.
The deposit is held by the card issuer until you pay your outstanding debt. These cards allow you to make credit card transactions and have your payments recorded in the credit bureaus.
Take advantage of any credit-builder loan that is available: A lender keeps the funds in a bank account while you make on-time payments toward the loan with a credit-builder loan.
This money is recorded to the credit bureaus, which helps to raise your score. You receive the cash only after you’ve made all of your payments.
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Step 3: Reduce the amount you owe on other debts
To assess if you have too much debt, your debt-to-income ratio is vital.
Take your monthly debt payments and divide them by your monthly income to get a percentage for your DTI ratio.
Consider ways to cut back on your expenses and save money for debt repayment. Before applying for a personal loan, avoid taking on new debt.
Step 4: Look for opportunities to boost your earning
Increasing your hourly pay will help improve your DTI ratio, allowing you to obtain a loan. You may not have to beg your employer for a raise.
Consider earning extra money as a Uber driver or tutor to add a hundred dollars or more each month to your bank account.
Include all sources of household cash on the application when reapplying, not just your full-time employment.
Your spouse’s income, investment profits, child support, or alimony are all taken into account by some lenders.
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Step 5: Prepare to apply again and pre-qualify
Take a different approach with your next loan application.
- Lenders will want to double-check the information you’ve provided on your application, such as tax returns, to ensure that you qualify. Having these documents prepared might make the application process go more smoothly.
- Make sure that all information is correct. If your application includes incorrect information such as an incorrect address or misstated income, it may be denied. Before submitting your application, double-check everything.
- If you don’t qualify for a loan on your own, consider asking for a co-signer. If you don’t meet the credit score criteria of a lender, consider enlisting the help of someone with excellent credit for your application. You might be able to qualify and get a lower interest rate this way.
- Pre-qualify. Due to the many different ways that lenders evaluate data, one lender may be unable to qualify you based on your credit score while another may be able to do so. Pre-qualifying allows you to see what kind of price and loan size you could expect before it affects your credit score. Online lenders frequently offer this service.
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Frequently Asked Questions
The most frequent reasons for denial include a poor credit score or history, a high debt-to-income ratio, little job stability, insufficient income for the requested loan sum, and as well as missing essential information or documentation within your application.
If your application for credit is denied, your lender is legally required to send you a notice of adverse action that explains the origin of the information used against you (credit reports or data from an outside source)
Unsecured personal loans are only accessible to individuals with credit scores of at least 660 because of their higher risk of default.
If you don’t have any income, you’ll find it difficult to obtain a personal loan. To demonstrate that you’re capable of making monthly payments, you’ll need earnings.
Abdulrahman is the founder of Financeive and a financial advisor with +3 experience writing about loans and debts. He took the Nanodegree from Udacity with a degree in Business Administration and had previously finished his bachelor’s degree in Accounting as well.
He is an expert on Personal Finance who knows how to make sure that your finances will not hold anyone back anymore – even if they are struggling with paying off previous debts or just starting their life financially alone as a young adult without much income yet but lots of potential opportunities ahead.
He used to help Individuals and Small Businesses to get loans with low interest and has figured out ways to help most of them to get out of loans Debt.