Feeling frustrated because you need a loan and keep getting turned down? Trust me, you're not the only one. It's a tough spot, and it's easy to feel stuck.
But here's some good news: This blog is about turning things around. We're going to break down the reasons you might be getting declined and give you actionable advice to improve your chances.
From diving into loan denial reasons to tips on improving your credit, we've got you covered. Ready to make a change? Let's dive in.
Receiving a loan rejection can happen, but it's less common than some might think.
In 2022, a significant portion of adults applied for credit, and while there were gaps in financial service access for some, the majority were able to obtain credit. Understanding the reasons behind loan denials can help improve your chances of approval in the future.
If you need a loan but keep getting declined, it could be because of your credit score. Lenders check your credit history to determine if you can repay the loan and the risk involved in lending you money.
If you have late payments, defaults, or bankruptcies, your credit score will likely be low, and lenders may consider you a high-risk borrower. As a result, you may find it challenging to secure a loan, and even if you do, you may be offered less favorable terms and higher interest rates.
One common reason why people get denied loans is a high debt-to-income ratio. Your debt-to-income ratio is how much debt you have compared to how much money you make. It's typically expressed as a percentage, and lenders use it to determine how much debt you can handle.
To calculate your DTI, add all your monthly debt payments (including credit card bills, car loans, and student loans) and divide that by your gross monthly income (your income before taxes and other deductions are taken out). Then, you multiply that number by 100 to get your DTI percentage.
Lenders use this ratio to determine how much debt you can afford and whether you're a risky borrower. A high debt-to-income ratio means you're using a significant portion of your income to pay off debt. As a result, you may need more left over to cover new loan payments.
People with unstable employment histories often find themselves in situations where they need a loan but keep getting declined. This is because lenders typically look for stable employment as a sign that you have a reliable source of income and are more likely to repay your loan.
If you've had a lot of job changes, gaps in your employment, or a history of being laid off, lenders may consider you a risky borrower and deny your loan application.
Lenders typically require that borrowers meet certain income requirements to repay the loan. If an individual's income does not meet the lender's minimum requirement, the lender may consider them a higher-risk borrower and may decline their loan application.
Generally, most lenders require borrowers to have a minimum annual income of $20,000 to $30,000 to qualify for a personal loan.
However, the minimum annual income requirement can vary by lender, loan type, and the amount you request.
Another reason people are commonly declined for loans is missing information or paperwork. When applying for a loan, lenders typically require certain information and documents to assess your creditworthiness and ability to repay the loan.
The lender may only accept your application if you provide all the required information or paperwork.
You must provide proof of income, bank statements, and tax returns when applying for a loan. Lenders may also require personal documents like a valid ID, Social Security number, and proof of residency.
Missing or incomplete financial and personal information can make it difficult for the lender to evaluate your application. As a result, it may result in a denial.
It can be discouraging and frustrating if you can’t get a loan, especially when you need the funds urgently.
But you can take steps to increase your chances of loan approval in the future. We’ve highlighted five of them below.
If you've been declined for a personal loan, the first step you should take is to review your decline notice. Most lenders will provide a reason for the decline, which can help you understand why your application was rejected.
The reasons will likely include the ones mentioned in the previous section. Once you receive your decline notice with the reason for the rejection, you can take the following steps to address the issue and improve your likelihood of future loan approval.
If your credit score contributed to your loan application being declined, request a copy of your credit report and review it for inaccuracies. Your credit report contains information about your credit history, including your payment history, outstanding debts, and any accounts in collections.
You can get a free annual credit report from Equifax, Experian, and TransUnion. You can obtain them by visiting AnnualCreditReport.com.
Once you have obtained your credit reports, please review them carefully to ensure that all of the information is accurate and up to date. You can file a dispute with the credit reporting agency if any information needs to be corrected.
If the agency confirms the information is inaccurate, the information will be removed, and your report will be updated accordingly. It would be best to wait several months until the inaccurate information is removed and your score improves before applying for a loan again.
However, if inaccurate information isn’t the reason for your low score, there are steps you can take to improve your score. Here are a few ways to boost your credit score:
If your credit score or income is below the lender’s minimum requirement, consider getting a co-signer to help improve your approval chances.
A co-signer is someone with good credit and income who agrees to repay the loan if you cannot. A co-signer with good credit and a high income can increase the likelihood of getting approved for a loan. A co-signer can assure the lender that the loan will be repaid.
When you apply for a loan with a co-signer, the lender will evaluate your and your co-signer's creditworthiness and income to determine eligibility. If the co-signer has a good credit score and a stable income, it can help offset any potential weaknesses in your credit or income.
When looking for a co-signer, choose someone who has a good credit history, a stable income, and is willing and able to take on the responsibility of co-signing the loan. If you cannot, this person will be equally responsible for repaying the loan. So it would be best to choose someone you trust and who is financially stable.
Remember that if you cannot make your loan payments, your credit score and the co-signer's credit score will be negatively affected. The co-signer is automatically responsible for repaying the loan if you cannot.
If the loan defaults, collections can go after both individuals, and the debt will stay on your credit reports for about seven years.
If your loan application was declined because of a high DTI or insufficient income, consider applying for a smaller loan amount. Before submitting a new application, carefully review your budget and repayment capabilities.
First, track your income and expenses for one month. This will give you an idea of where your money is going. Next, categorize your spending into needs, wants, and savings. Try using a budgeting app or a simple spreadsheet for this.
Once you have a clear picture of your spending, consider discretionary areas where you can reduce spending. Sometimes, you may no longer need to apply for a loan if you free up enough extra money.
But, if you still need a little extra boost, opting for a smaller loan amount could improve your chances of getting approved. Making timely payments on a smaller loan can also help improve your credit history and score.
When you need a loan but keep getting refused, it could be because you don’t meet the lender’s eligibility requirements. Consider shopping around and applying with other lenders to increase your chances of approval.
Different lenders have different criteria for loans, so it's worth comparing rates, terms, and requirements from multiple providers. Look for lenders that are willing to work with your credit profile. Or search for lenders that offer alternative options, such as secured loans.
Before applying for a loan, check the lender's eligibility criteria to ensure you meet their requirements. Hard credit checks negatively impact your credit score, so be selective with your applications and only apply for loans that align with your repayment and budgeting abilities.
If your loan was denied because of missing or incomplete information, don’t immediately reapply. Too many loan applications in a short period can negatively impact your credit score.
If possible, wait at least 30 days before submitting another application. This time, check the lender’s requirements and prepare all your financial and personal documents beforehand.
Also, ask the lender if additional information is needed. Sometimes, the lender may ask for more documents to determine your eligibility.
You're not alone if you've been struggling to get approved for a loan. If you need a loan but keep getting declined, you can take proactive steps to boost your likelihood of approval.
These include checking your credit report and working to improve your credit score, ensuring you meet the lender's minimum income requirements, and providing all the necessary information and paperwork.
Let’s take a look at some frequently asked questions regarding loan denials.
The time you should wait to apply after your loan application was declined depends on the reason for the denial and the lender's specific policies.
Generally, waiting at least 30 days before reapplying for a loan is best. This gives you time to address any issues that led to the denial, such as paying down debt or improving your credit score.
However, if you were denied due to a significant issue such as bankruptcy or foreclosure, you may need to wait longer before reapplying.
Additionally, if a specific lender denied you, consider applying with another lender with different underwriting criteria.
Secured loans and unsecured loans are two types of loans available to borrowers. The main difference between these loans is whether collateral is required. A secured loan requires collateral. An unsecured loan does not.
Here are some more differences between the two: