It can be frustrating when your personal loan application is denied, but understanding the reasons behind the rejection is crucial. There are several reasons why your loan application would be rejected, and there are ways you can prevent it from happening. Low income and low credit ratings are two factors that could lead to the denial of your personal loans.
Understanding the reasons for denial is an effective way to fix and avoid certain things that may affect your application. Lenders assess a borrower’s ability to repay a personal loan based on factors such as income, work history, and DTI. This write-up contains several reasons why your loan would be denied and how to resolve them.
5 Reasons Your Personal Loan Application Was Denied
When you apply for a personal loan, approval is not assured. As previously stated, there are several reasons why your personal loan application was denied. Luckily, lenders are required to disclose these reasons to borrowers, giving them an idea of what they should work on to prevent denial next time. According to the law, lenders are required to send borrowers an adverse action notice, which indicates the reason for the denial, within 30 days. The following are some of the reasons why your personal loan was denied:
Low Credit Score
Credit score is a crucial factor in determining if a person can be denied a personal loan, as it indicates their ability to repay debts. This score is determined through several factors, including utilization ratio, payment history, and how old your oldest form of credit is. On the other hand, lenders view you as more reliable the better your credit score. Because personal loans are usually unsecured loans, your credit score plays an important role because no collateral is needed. You may be denied a personal loan if your credit score does not meet the lender’s requirements.
High Debt-to-Income Ratio
Debt-to-income ratio is a financial metric that informs lenders about your ability to repay the loan. This ratio calculates your overall income against all your existing debts. It displays how easily you will be able to manage paying off these debts with an additional monthly payment. However, you can calculate your DTI just by dividing the sum of your existing debt payments by your gross monthly income.
Unstable Income
Aside from your DTI and credit score, lenders also look into your income when deciding on your loan approval. They want to make sure your income is enough to keep up with your monthly loan payment so you don’t default on payments. It can be very risky to take out unsecured loans, and with an unstable income, the lender may deny you a personal loan. However, some lenders list out the minimum income requirement in their eligibility requirements.
Borrowing More Than You Can Afford
After reviewing your finances, lenders will determine the maximum amount you can borrow from them. The lender bases this amount on how much you can comfortably repay each month without negatively impacting your finances.ng your finances. If you plan to take a personal loan beyond your financial means, the lender may reject your application entirely. Instead of applying for a higher amount, it is advisable to request a loan that fits your financial situation.
You Do Not Meet the Lender’s Requirement
While every lender has different loan requirements, most lenders put effort into ensuring these requirements are met to qualify for a loan. Although every insurer has different requirements, the following are some of the common requirements:
- Borrowers must be of age 18 and above.
- Applicants must be United States citizens.
- Have a permanent bank account and address.
- A working email address.
If you do not meet these requirements before you apply, you are likely to be denied a personal loan.
How to Avoid Your Personal Loan Application Getting Denied
There are several ways to prevent denial in your personal loan application. Before taking out another loan, the following are certain things you need to improve:
Grow Your Credit Score
A low credit score is one of the reasons you may be denied a personal loan. Before applying for a new personal loan, build your credit score by disputing errors on your credit report. Also, paying on time, waiting for negative items to fall off your credit report, and applying for new forms of credit sparingly.
Before Time Improves Your Debt-to-Income
To enhance your debt-to-income ratio, you can either reduce your debts or increase your income. Doing these can improve your DTI, giving you a better chance of getting approved for personal loans.
Select a Loan Amount You Can Afford
If your loan is denied because you tried borrowing more than you can afford, you can request a lower loan amount. The solution to this is very easy: how much you can borrow will be based on your income and how much you can pay every month.
Get a Cosigner
You can increase your chances of getting approved for a loan by seeking help from someone else. It is important to select a cosigner who has a good credit score and can help you secure a loan with lower interest rates.
