Getting a personal loan can be a great way to finance a large purchase or consolidate existing debt. However, there are certain criteria that must be met in order for you to qualify for a loan. Some of the reasons your loan application might be denied include a low credit score or low credit profile, a high debt-to-income (DTI) ratio, insufficient income, unstable employment, or a mismatch between the purpose of the loan and the loan purpose requirements of the lender. False information in your application, such as incorrect address and misreported income, could also result in a loan denial. If you need a loan but can't seem to be approved, the first step you need to take is to determine the reason your loan application was declined.
Consider calling the lender to ask directly or review the adverse action notice provided to you at or after the denial. If they can't provide you with a specific reason for the denial, you'll need to do some more research into your current financial situation. Even if your credit history is OK and you have made all your monthly payments on time, you may be denied a loan application if your debt-to-income ratio (the sum of all your debts divided by your monthly income) is too high. Generally, a low DTI (less than 40%) indicates to lenders a healthy balance between debt and income. Not all lenders have the same lending criteria and requirements. Rates, fees, and terms can also vary widely from lender to lender.
If you search and compare several loan offers to each other, you could end up saving hundreds, or even thousands, of dollars over the course of your loan. Many factors influence the determination of eligibility for a personal loan. Common reasons for rejection include a low credit score or poor credit history, a high debt-to-income ratio, unstable work history, income too low for the desired loan amount, or lack of important information or documentation in your application. Your loan could also be refused if the purpose is not for an eligible reason, such as trying to apply for a personal loan to invest. Credit report errors are more common than you think and can easily prevent you from getting a personal loan. According to a study by the Federal Trade Commission, one in four consumers has found at least one error in their credit file.
While your credit and income are the main factors that lenders consider, they don't tell the whole story. As such, you may be denied for other reasons such as your work history, stability of residence, and liquidity or cash flow problems. To improve your chances of qualifying for a personal loan, make sure that all of your information is accurate and up-to-date. Additionally, try to keep your DTI below 40% and make sure that you have enough money saved up for an emergency fund. If your credit score falls below this threshold, it may be more difficult for you to get approved for a personal loan. Being denied a personal loan (especially if it has happened more than once) can be extremely daunting and can leave you feeling like you have no other options. Although not part of the qualification process, many lenders require borrowers to pay personal loan origination fees to cover the costs of processing applications, conducting credit checks, and closing.
If you have decided that a personal loan is the right type of financing for you, follow these eight steps to apply:
- Check Your Credit Score
- Check Your Debt-to-Income Ratio
- Gather Necessary Documentation
- Compare Loan Offers
- Choose Your Lender
- Submit Your Application
- Wait For Approval
- Sign The Loan Agreement
A personal loan can be a way to consolidate your existing debts and potentially lower your interest rate but you may not qualify if you already owe a lot of money. The last thing you or the lenders want is for you to take out a personal loan and not be able to repay it. Being aware of these potential disqualifying factors can help ensure that when it comes time to apply for a personal loan, you're well prepared.