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Getting rejected for a loan can be frustrating, but understanding the reasons for loan denial can help you get things in order to get approved the next round. Loan denial is nothing to take personally – lenders have requirements that have to be met and may deny many applicants for that reason.
Here are the most common reasons for loan denial and what you can do to get approved.
5 Reasons for Loan Denial
Whether you’re applying for a personal loan, home loan or auto loan, lenders may reject your loan application for a number of reasons. There could be basic requirements you don’t meet – like being 18 years old – or there could be information missing from your loan application. If those more general reasons don’t pertain to you, here are some more specific reasons for loan denial that you can do something about to get approved next time.
1. Low credit score
Lenders consider your FICO credit score to determine how you manage money and whether you’re likely to afford your loan payments. Your payment history and the amount you owe heavily make up your credit score and it can tell a lender where you sit with your debt management.
Credit score requirements may vary based on the loan product. Keep in mind that lenders will likely have stricter credit score requirements when it comes to an unsecured loan , where there’s no collateral attached.
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2. High debt-to-income ratio
A loan can also be denied if your debt-to-income ratio is too high. Your debt-to-income ratio is the total of your monthly debt payments – like car payments, credit card debt, college loans, and other debts – divided by your gross monthly income. The lower your DTI, the better chance you have at getting approved for a loan.
You may see different DTI limits for different lenders and different loan products. For example, when applying for a home loan, lenders typically don’t want to see your debts plus housing costs – including mortgage, homeowners association fees, property tax, etc. – totaling any more than 50% of your monthly income. Depending on the scenario and institution, DTI requirements may range from 36-50%. The lower you are on that range, the better.
3. Unstable employment history
Lenders look for consistent income on your application, so they can assume your income will remain that way and you’ll be able to make your payments on time. If you have changed jobs recently, had a gap in employment, or have multiple income streams from freelance work, it’s possible that your income calculations could flag your loan application.
This doesn’t mean your loan application will always be denied. If you document your income accurately and thoroughly, you may be able to work with your lender so they can compare your income over a longer period of time to ensure consistency.
4. Insufficient income
Along with income consistency, lenders may have a threshold for how much income you need to earn to qualify for the loan amount you applied for. If your income doesn’t meet the requirement, you may be denied or offered a loan for a lower amount.
Again, if you freelance or are self-employed, you’ll need to be thorough in how you report and prove your income.
How to Prevent Loan Denial and Get Approved
You can prevent loan denial by practicing good money management and ensuring consistent employment and income. If you know you’ll be applying for a home loan soon, work to improve your financial health so when the time comes, you’re likely to get approved. If you were rejected for a loan, use these tips to get your finances in order and get approved the next time.
1. Build credit
When you apply for a loan, a lender will want to make sure you have a history of reliable borrowing. If you were denied a loan because your credit score was too low, or you want to apply for a loan but don’t have any credit history established, there are steps you can take to rebuild or jumpstart your credit.
- Get a credit card and use it wisely. 65% of your credit score is based on how well you make your payments on time and how big of a balance you carry on your card throughout the month. By making on-time payments and keeping your balance low, you will improve your credit score.
- Become an authorized user on someone else’s account. When the authorized user is added to the primary account, the authorized user will benefit from the primary account holder’s longer record of on-time payments and lower credit utilization.
- Review your credit report. There could be errors that are lowering your score, so take time to review your report for accuracy and dispute any errors you see. Use this time to pay off accounts and remove outdated debts to ensure your credit report is up to date.
2. Increase income and eliminate debt
To help lower your debt-to-income ratio, look at paying off debt as soon as you can. If possible, look at picking up a side jo
3. Apply for a realistic loan amount
You may have been rejected for a loan because the amount asked for was too high in comparison to your DTI or other factors. You may get approved for a loan simply by asking for an amount that’s more in line with what you’re realistically capable of paying back. A smaller loan is less risky to the lender and more likely to get approved.
4. Consider applying with a co-signer
If you’re aware that your income is unstable or if you’re just starting out building credit history, applying with a co-signer might help you get approved for a loan. Be aware when applying for a joint personal loan that both individuals are obligated to repay the loan, and both have rights concerning the funds.
4. Prequalify
Check with your preferred lender on whether you can prequalify for a loan without impacting your credit score. Prequalifying doesn’t guarantee you’ll get approved for a loan, but you’ll get an idea of whether it’s likely or not.
Loan Denial FAQs
Why am I getting denied for a loan?
Lenders take into account your credit score and credit history, debt-to-income ratio, and income and employment consistency. Not meeting any of the lender’s requirements, may be a reason for loan denial.
You might get denied for a loan if you have a low credit score, high DTI ratio, inconsistent income or employment, or if you’re looking to use a personal loan in ways that go against the lender’s loan purpose requirements.
How can I ensure I get approved for a loan?
Improve your financial wellness by building good credit, eliminating debt, making payments on time, or working to increase your income. Also be sure to review your credit report thoroughly for errors or ways you can improve your credit score.
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How soon can I apply for a loan after being rejected?
If your loan was rejected due to an error in your credit report or application, you can get these things fixed right away and submit another application. However, if you need to rebuild credit or lower your DTI, this may take several months. Consider waiting at least 30 days before reapplying, but know that it may take longer to improve your credit score.
If you need a personal loan quickly, this might be the time to consider applying with a co-signer to help get the loan approved or applying for a smaller loan amount that aligns better with your finances.
Key Takeaways
- Common loan denial reasons include a low credit score, high debt-to-income ratio, insufficient income, inconsistent employment, or using a personal loan in a way that is not approved by the lender.
- You can prevent being denied for a loan by building good credit, eliminating debt, increasing your income, and requesting a loan amount that’s in line with your finances.
- Consider applying with a co-signer to get approved for a loan.
Remember, getting denied for a loan is nothing to take personal. Loan denial reasons can be remedied by improving your financial fitness. Keep working to build healthy credit, pay off debt and improve your credit score. The more you understand about how your credit score works, the better you’ll be able to maintain good credit and get approved for any loan.
APR = Annual Percentage Rate
