There’s no need to feel bad if you get denied a loan. You’re certainly not alone. With inflation on the rise and the possibility of a recession looming, many Americans are finding it difficult to keep up with their finances.
Personal loan debt has increased by 24 percent since 2021, although the number of borrowers is still lower than it was in 2019. While personal loans are becoming more popular and people are racking up more debt, qualifying for one can be tough. However, there are several things you can do to improve your creditworthiness and increase your chances of being approved for a loan.
Loan qualification statistics
- In the first quarter of 2023, Americans owed 1.1% of their outstanding debt in the form of loans.
- Since 2021, delinquencies on personal loans have increased by 2.68%.
- In 2018, 76% of people who applied for personal loans were rejected.
- People with poor credit scores are typically denied personal loans.
Personal loan requirements
For you to qualify for a personal loan, there are some standards that you must meet. Lenders review your application and decide whether or not they want to give you the loan and what terms they are willing to offer based on how creditworthy you are and how likely it is that you will repay the loan.
Here are some of the main things lenders take into consideration when reviewing personal loan applications:
- Collateral. Personal loans that are secured by collateral are not as common but tend to be easier to obtain. Collateral for a personal loan can be any valuable asset, such as a home or car. Taking out a loan specifically to pay for your home or car is considered a secured loan because you are using your asset as collateral. Although secured loans are less risky than unsecured loans, you still run the risk of losing your asset if you default on the loan.
- Credit score and history. The most important factor in determining loan eligibility is credit score. Credit scores range from 300 to 850, with higher scores indicating a greater likelihood of loan approval. Factors influencing credit score include credit history and reliability of debt repayment.
- Debt to income ratio. The amount of debt you have relative to your income is called your debt-to-income ratio. Lenders use this number to help predict the likelihood that you will be able to repay a loan. A lower debt-to-income ratio is better; most lenders prefer ratios below 36 percent, but some will accept ratios as high as 50 percent.
- Income. Most lenders will require some proof of income when you apply for a loan, even if they don’t have a set minimum. This is to ensure that you will be able to repay the loan.
| Credit score range | Average APR | Average loan amount |
|---|---|---|
| 720+ | 9.81% | $18,812.69 |
| 680-719 | 16.01% | $15,214.76 |
| 660-679 | 23.54% | $11,727.69 |
| 640-659 | 28.93% | $9,470.86 |
| 620-639 | 35.98% | $7,350.97 |
| 580-619 | 54.17% | $5,746.62 |
| 560-579 | 85.24% | $4,250.88 |
| Less than 560 | 135.83% | $2,817.03 |
Different lenders have different requirements for what constitutes a “good” credit score. However, in general, the higher your credit score, the more likely you are to qualify for a loan with favorable terms. This means that you’re more likely to get a lower interest rate and a larger loan amount from a lender.
Additional documents
There are a few things you should have ready before applying for a personal loan. Most importantly, you’ll need a loan application. Each lender has its unique application, so make sure to read the requirements carefully. You’ll also need to provide some basic information about yourself and your finances, as well as how much you want to borrow and why. Lastly, you’ll need to show proof of your identity, income, and address. Having all of this ready before starting the application process will make things go more smoothly.
Reasons personal loans are rejected
The following are some reasons why your loan application might be rejected:
- Bad credit history: It’s important to have a good credit history. This shows creditors that you’re likely to repay what you owe, based on your past transactions. Your credit score is one way to judge your credit history, but lenders also look at your financial history when making decisions about lending to you.
- High debt to income ratio: The debt to income ratio (DTI) is the percentage of monthly income that goes towards paying debts. Lenders use DTI to assess borrowers’ ability to repay loans. A high DTI (50% or more) indicates that a borrower may have difficulty repaying a loan.
- Incomplete application: There are many reasons why you might be rejected for a loan. One possibility is that you simply didn’t provide enough documentation. Be sure to double-check that you have completed the application in full and submitted all the required paperwork.
- Lack of proof of steady income: Lenders often rely on tax returns to get a clear picture of a borrower’s employment situation. Consistency is therefore key to avoiding any confusion or misunderstandings.
- The loan doesn’t fit the purpose: You might not be able to do everything you want with loan money. The lender may have some suggestions that could better fit your needs.
- Unsteady employment history: Borrowers who have a history of steady employment are more likely to be approved for a loan than those with unsteady employment.
What to do if you are denied
Whether you’re applying for a personal loan, mortgage, or auto loan, being denied can be frustrating. It’s important to know why your application was denied to take the necessary steps to improve your chances of being approved next time. Here are some of the most common reasons for loan denial and what you can do about them.
Bad credit is one of the primary reasons for loan denial. Lenders want to see a history of on-time payments and responsible credit management. You can improve your credit score by paying your bills on time, maintaining a good credit utilization ratio, and disputing any errors on your credit report.
Another reason for loan denial is a lack of credit history. To create a positive credit history, start by using a secured credit card or becoming an authorized user on someone else’s account.
Review and build your credit score
There are a few things you can do to increase your chances of qualifying for a personal loan, but building your credit score is by far the most important. Checking your credit score regularly (preferably once a month) helps you catch any mistakes that may be lowering your score, and gives you an idea of where you stand in terms of qualifying for a loan. You can check your credit score without harming it by doing a soft inquiry, which will show you your score and credit history.
Once you have reviewed your credit report, there are several things you can do to improve your credit score. Be punctual with all debt payments, and keep credit card balances low to avoid taking on extra debt. You may also want to become an authorized user on someone else’s account – this can be helpful if that person has a better payment history and a lower utilization rate.
Pay down other debts
Lenders typically prefer applicants with a DTI below 36 percent, although some are willing to work with those whose DTIs are as high as 50 percent. A high debt-to-income ratio can make it difficult to qualify for a loan, so it’s important to take steps to lower your DTI before applying for credit.
One way to do that is to create a budget and cut down on monthly expenses. You may also want to consider consolidating your debts into one loan. This can help reduce your monthly payments by combining all of your debts into one payment. Ideally, the interest rate on the new loan will be lower than what you were paying before consolidation.
Look for ways to raise your income
One way to become more attractive to lenders is by increasing your income. This can help lower your DTI, making it easier to qualify for loans. To supplement your income, consider asking for raises at work, getting another job, or finding side gigs. When reapplying for loans, be sure to include any household income in addition to your full-time job.
Compare personal loans
When it comes to personal loans, there is no one-size-fits-all solution. Each lender has different requirements, rates, terms, and fees. And what works for one person might not be the best option for another. That’s why it’s important to do your research and compare rates before applying for a personal loan. By prequalifying with a few different lenders, you can get a better idea of what you’ll be eligible for and find the loan that best suits your needs.
Prepare for your next application and prequalify
Different lenders have different requirements for pre-approval. However, in general, getting pre-approval means that you meet the initial requirements set by the lender. Many lenders allow you to get pre-approval without impacting your credit score or making a commitment. However, your pre-approval could be denied later on down the road by changes such as your income or credit score.
When you are ready to reapply, make sure that all of your documentation is up to date and accurate. This includes reflecting on any changes you may have made, such as increased income or improved credit score. You may also want to look into finding a cosigner. This option is not just for people who don’t meet requirements- it can also give people an extra boost in getting a lower rate. However, a cosigner is responsible for paying for any missed payments.
When to apply for a loan again after denial
It’s never a good idea to apply for multiple loans or lines of credit at the same time. Every time you do, it results in a hard inquiry on your credit report, which can temporarily lower your credit score. So it’s always best to space out your applications, and experts recommend waiting at least six months between applying for new credit.
In the meantime, try to resolve the reason why your loan was denied in the first place. You can start by paying down any outstanding debts and then work on improving your credit score. You may also want to consider increasing your income, and research lenders with more relaxed eligibility requirements. And be sure to check for updated credit reports before submitting another loan application.
The bottom line
It can be tough to be denied a loan, especially when you need quick cash. But don’t despair! There are plenty of things you can do to improve your chances of being approved the next time you apply.
For starters, try applying for a smaller loan amount. The lower the amount you request, the higher your likelihood of approval. You can also try reapplying for a loan after waiting at least one month. This gives you time to improve your credit score and debt-to-income ratio, which will both increase your chances of being approved.
There are also loans available for bad credit borrowers that have more relaxed requirements. However, keep in mind that these loans usually come with higher interest rates. Only sign up for one of these loans if you’re confident you’ll be able to make the monthly payments plus interest and fees.
