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Why Your Personal Loan May Have Been Denied

Reasons Your Personal Loan May Be Denied
Austin Kilham
Austin KilhamUpdated March 13, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A personal loan can help cover all kinds of important expenses, including home repairs, consolidating debt, and covering an unexpected medical bill. So getting denied for a personal loan can feel like a major setback. But know this: Loan denial happens to a lot of would-be borrowers. And it’s nothing personal. It simply means that you didn’t meet the lender’s requirements. Fortunately, there are ways to overcome this challenge. Knowing the loan denial reasons could help you take steps to improve your financial situation. Read on to learn some of the common reasons for a denied loan — plus, how to boost your chances of approval the next time you apply. 

8 Common Reasons for Personal Loan Rejection

There are a variety of reasons you may have been denied a loan, including these common explanations.

You Didn’t Meet the Basic Requirements 

Before applying for a loan, check to make sure you meet your lender’s personal loan requirements. For example, you’ll probably need to be at least 18 years old and a U.S. citizen or qualifying resident and have a current bank account. Otherwise, you’ll likely be rejected for a loan.

Poor Credit History

Your credit history paints a picture of how you manage debt. A good credit history may suggest that you have a track record of paying your bills on time. A poor credit history might mean you’ve been delinquent with payments. Banks see borrowers with poor credit as having a greater risk of defaulting on a loan. There are personal loans for bad credit that you may want to consider next time around.

High Debt-to-Income Ratio

Your debt-to-income ratio (DTI) shows how much debt you’re carrying versus how much money you bring in each month. The higher this ratio, the more a lender may worry that you’ll have trouble making payments on a new loan. Ideally, lenders like to see a DTI of 35% or lower.

Inconsistent Employment 

Lenders may check to make sure you’re employed and have a steady paycheck. If you’re a freelancer whose work varies from month to month, or you’ve recently changed jobs, it may be more challenging for you to find a loan. 

Insufficient Income

In addition, lenders want to know that you’re earning enough income to pay your bills each month. If your income is unstable, or a lender doesn’t think it’s high enough to cover your payments, they might reject your loan application. Check out your options for personal loans without income verification.

Loan Purpose Was Off Limits

You can use a personal loan for almost any reason, but each lender may have restrictions on personal loan uses. For example, the loan terms might stipulate that you can’t use the loan to pay for business expenses. Your lender will ask you what you intend to use the loan for, and if your purpose falls outside what they allow, you may be denied for a personal loan.

Tried to Borrow too Much

If you ask for a loan amount that is more than the lender thinks you can afford to pay back, you may get your loan denied. Be sure to be realistic about the amount you ask for, and avoid applying for a loan for more money than you need.

Missing Paperwork

Loan denial could happen if you fail to include a key piece of information with your application. Read over your application carefully before submitting it, and include any documentation the lender asks for. 

Tips for Increasing Your Chances of Approval

If a lender rejects your loan application, find out the reason for the denial, so you’ll know what you need to work on. (Lenders are required to send you an explanation for the rejection within 30 days.) These personal loan approval tips may strengthen your financial situation and potentially boost your chances for getting a loan in the future.

Improving Your Debt-to-Income Ratio

The lower your DTI, the better. A low debt-to-income ratio indicates that you have enough cash to cover monthly loan payments. Calculate your DTI by dividing your monthly debt (not including your utilities, cell phone, internet, and insurance bills) by your gross monthly income. If you have a DTI of 35% or lower, you’re on the right track. Any higher, and you may have some work to do. You can improve your DTI by paying off existing debts or increasing your income.

Stabilizing Your Employment Status and Income

Look for ways to make your employment status more stable and increase your earnings. For instance, if you’re a freelancer, you could get a full-time job with a steady salary. 

Strengthening Your Credit 

Your credit score is like a numerical representation of your credit history. Lenders see borrowers with higher scores as more creditworthy and tend to offer them loans with better interest rates and terms. The lower your score, the harder it typically is to secure a loan.You may be able to strengthen your credit. First, review your credit report from one or all of the major credit reporting bureaus — Experian®, TransUnion®, and Equifax®. Make sure the information is correct, and contact the bureaus immediately if you find any mistakes that could negatively impact your score. In addition, pay your bills on time — payments constitute a critical portion of your credit score. Also, pay down existing debt to lower the amount of available credit you’re currently using. This could help demonstrate to lenders that you’re not overextended.

Preparing for the Next Loan Application

When you apply for a loan again, gather all of the appropriate documentation — including pay stubs, tax returns, employment information, and your identification — to ensure that you’re providing everything your lender has asked for. Also, request a realistic loan amount you can pay back without stretching yourself thin financially. And make sure the purpose of the loan falls within the lender’s parameters. These actions may help increase your chances of approval.Finally, you may want to prequalify for a personal loan. This allows you to see the terms and rates a lender might offer you, without triggering a hard pull on your credit. 

Alternatives to Personal Loans

There are several alternatives to personal loans that you may want to consider if you are denied for a loan. They include such options as:
  • Credit cards. You could use a credit card to cover your expenses — if you have a card or you can qualify to get one. They are easy and convenient to use. Just keep in mind that credit cards have high interest rates. Unless you can pay off the full balance by the end of the billing period, you could end up paying a large amount in interest over time.
  • Car title loan. This is a type of short-term loan that uses your car as collateral. To qualify, you will need the car title to prove that you own the vehicle. But be aware that these loans typically have high interest rates and fees. Plus, you could lose your car if you can’t repay the loan.
  • Family loan. Taking out a family loan involves borrowing money from a relative and repaying it over a specified period of time. To avoid potential conflicts, it’s often wise to put the loan terms in writing. And make sure you can repay the loan on time in order to avoid family strife.

The Takeaway

Rejection for a personal loan might throw a wrench into your immediate financial plans, but it doesn’t have to derail them completely. By finding out why the lender denied the loan and taking some actions to improve your situation, you could boost your financial health and the odds of being approved for a personal loan in the future.  

3 Personal Loan Tips

  1. Personal loan interest rates vary from lender to lender, but generally depend on your credit score. With one online application, Lantern by SoFi makes it easy to find and compare the personal loan interest rates that you qualify for.
  2. If the interest rates you’re being offered seem too high, try lowering the loan amount. Generally, the larger the loan, the greater the risk for lenders, who likely charge a higher interest rate for the increased risk level.
  3. Watch out for lenders who advertise “guaranteed” loans. Legitimate lenders will want to know your creditworthiness before offering a loan.

Frequently Asked Questions

How do you know If you will get approval for a loan?
What do lenders look at when you apply for a personal loan?
Can a lender deny you a loan after preapproval?
Photo credit: iStock/Delmaine Donson

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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