Why Would a Personal Loan Be Declined?

When you apply for a personal loan, there's a chance that you might be declined. Should this happen to you, it's important to understand why a lender may make that decision. That way, you can figure out a plan to re-apply for a personal loan and have a better chance of getting approved.

5 Reasons Why Personal Loans May Be Declined

When a lender declines your personal loan application based on information from a consumer credit report, they have to tell you the reason. Understanding the cause of your application being declined can help you change your behaviors and improve your chances of securing a loan in the future.

Low Credit Score

Your credit score is often used to make decisions about loans because it's considered a measure of the likelihood that you'll repay a debt.

If you have a poor credit score, a lender might decide providing you with a loan is too big of a risk. They may assume you won't repay the loan, or your missed payments might result in the need to attempt to collect from you.

High Debt-to-Income Ratio

Another consideration is whether or not you have a lot of debt relative to your income. When determining your debt-to-income (DTI) ratio, lenders take into account your monthly income compared to the total amount of your monthly debt payments.

For example, if your monthly debt bills include $1,000 for your mortgage, $450 for an auto loan, and other debt payments (such as credit card minimum payments) totaling $300, your overall debt payments are $1,750. If your monthly gross income is $4,000 per month, you divide your debt payments by your income to get a DTI of approximately 44%. That means that 44% of your income each month goes toward your debt.

Lenders typically prefer to see a DTI of 35% to 40% or lower for personal loan applications. So, while lenders can always make exceptions to this general rule if they so choose, there's a chance that a high DTI could lead to being declined for a personal loan, even if you have good credit.

Low Income

Another concern is that you might not have enough money to repay the loan. The lender might look at the amount of your loan and potential monthly payments, and they may decide that your income isn't large enough to handle it.

Unstable Employment or Source of Income

Because personal lenders are interested in receiving regular payments for the loan, they are also interested in making sure that your income is relatively stable.

If you haven't had a job for a long period of time, or if your employment history is spotty, a lender might be reluctant to provide you with a loan. After looking at pay stubs and tax returns, a lender might decide your income isn't consistent enough for you to make regular payments.

Failure to Meet Basic Requirements

Every lender has its own criteria for providing funds for loans. Some basic requirements that lenders may have include:

• U.S. citizenship or some type of residency
• Being a certain age, such as 18, 19, or 21
• Having a bank account

There might be other requirements, such as being employed or providing proof of assets. If you don't meet those basic requirements, your personal loan might be declined. Before applying for a personal loan, make sure you understand the lender's requirements.

What to Do if Your Personal Loan Was Declined

If you receive notice that your personal loan application was declined, there are some steps you can take to learn more about the situation and potentially find better success:

• Talk to your lender: Start by finding out why your loan was declined. That information can give you a foundation for a more successful application later on. Additionally, you might be able to explain an extenuating circumstance and get the lender to reconsider.
• Find a different lender: Each lender has its own criteria, so you might be able to get a loan elsewhere. If your credit score is too low for one lender, you might be able to secure funding from a different lender that specializes in bad credit personal loans.
• Offer collateral: Not all personal lenders accept collateral, but some do. You might be able to offer an asset as security for the loan, prompting the lender to give you another chance.
• Provide additional documentation: Depending on the situation, you might be able to have your application reconsidered if you can provide more documentation related to your income and its stability.

How to Improve Your Chances of Getting a Personal Loan

Even if you don't get a personal loan this time, you might be able to improve the odds that you'll get a personal loan in the future. Here are some steps you can take to boost your chances of securing a personal loan:

• Improve your credit score: Because lenders rely so heavily on credit history to make decisions, taking steps to increase your credit score can help. Make on-time payments, reduce the amount of debt you have, and make an effort to ensure that your credit score reflects your ability to make payments.
• Get a co-signer: If someone is willing to take on responsibility for your debt, you might be able to qualify for a personal loan, even if your own credit score is poor. In general, a co-signer should be someone with good credit and a stable income.
• Use collateral: You can often collateral like a car, home, or bank account as security for a loan. However, you risk losing the valuable asset if you don't make payments.

The Bottom Line

Lenders have the ultimate decision-making power when it comes to who they will provide loans to. In general, though, if you're denied a personal loan, it most likely has to do with your credit score, income situation, or DTI. Before you apply, check the lender's criteria to determine if you're likely to qualify.