So you recently applied for a personal loan, hopeful of getting some financial relief and help with the bills that won’t stop coming—only to be denied. Now what? Rejection is never fun, but when your financial stability is on the line, it can really sting. When it comes to personal loan approval, banks and other lenders are very strict about who they loan money to.
To help you prepare to apply for a loan or to simply dust yourself off after being denied a loan, this guide will walk you through common reasons why you might not qualify for a personal loan, how to get approved for a loan, and what to do next if you’re denied a loan.
Concerns While Applying for a Loan
While applying for, or considering applying for, a personal loan, there are a lot of worries on your mind. You’re concerned about making ends meet and paying your bills. There are several reasons why someone might want to take out a personal loan, from unexpected medical or repair bills, to shut off utilities, a lost job, or an expensive home renovation project.
All of these can put a strain on your budget and make it hard to cover the day-to-day necessities. Personal loans can help alleviate that stress, but you may still be worried about whether or not you will be approved for the loan. You might also worry about your credit score, other loans you owe, interest rates on the loan, and whether or not you’ll be able to fit the payments within your budget.
Can You Get Denied for a Personal Loan?
Your application for a personal loan can be denied by your lender. When you apply for a personal loan, you will be asked questions about your income and a credit check will be performed, revealing your credit score, credit history, debt-to-income ratio, and more.
Many lenders use a computer algorithm to determine eligibility for a personal loan. This algorithm sorts through loan applications, separating the low-risk applicants from the high risk. If you end up in the high-risk pile and don’t meet the eligibility criteria, then your loan application will likely be denied.
Why Would My Bank Not Give Me a Personal Loan?
Your bank most likely denied your personal loan because you were a high-risk applicant. Banks generally have strict standards of eligibility when it comes to personal loan approval. In fact, banks and other traditional institutions such as credit unions have much lower personal loan approval rates than online and other lenders.
As part of the application process, your credit history is reviewed. Lending banks want to see if you have a track record of making on-time payments and a history of handling debt well. You don’t need to have a perfect credit score, but it helps to have some evidence that you have experience with debt and that you pay your monthly bills on time.
If your credit history suggests that you generally handle debt well, you are more likely to be approved for the loan. If you have no credit history or poor credit history, your lender will consider it risky to lend money to you, because there is less evidence that you will pay it back on time.
Why Can’t I Get Approved for a Personal Loan?
There are several reasons why you weren’t approved for a personal loan. The most common reasons include:
- Poor Credit Score: Some lenders have a specific minimum credit score in place, and if yours is too low, you won’t make the cut.
- Low Income: To be approved for a loan, you need to prove that you can pay it back by showing that you have money coming in. If you don’t make enough money, or if you cannot document your income sources, your loan application will be denied. Those who are self-employed need to show evidence of a steady income.
- Job Changes: If you have recently lost a job, or even recently just started a new one, you may be denied because it isn’t clear that money is coming in.
- Too Much Debt: Applicants who have excessive debt, especially if they have recently taken out a new car loan, student loan, or mortgage, may find their application denied. If you are already spending a portion of your income on debt, lenders may worry that there won’t be enough to pay back an additional loan.
- Poor Documentation: A number of documents are required to apply for a loan, and if you cannot provide the evidence of income and other information the lender requires, or if there is any discrepancy between the documents, you will be rejected.
What to Do Next If You’ve Been Denied a Loan
After you’ve been denied a personal loan, follow these steps:
- Find Out Why. Your lending institution is required by law to let you know the reason, but you may need to pursue this information yourself. After you understand why you’ve been denied, you can make some changes to improve your chances of approval next time.
- Check Your Credit History. You have 60 days to request a free copy of the credit report used by your lender to evaluate your loan application. Check it carefully for any errors, such as an account you didn’t open or an on-time payment marked as late. Make sure you have documentation to prove any mistakes and contact the credit bureau to dispute them.
- Work on Your Credit. If you have a low credit score, take some time to build it back up. Focus on paying down your existing debt, wait while before applying for a new loan (each application will temporarily knock down your score), and make your payments on time.
How to Get Approved for an Installment Loan
To get approved for an installment loan, follow these steps to increase your chances:
- Check the minimum credit requirement and make sure you meet it before applying.
- Check the minimum income requirement and track down enough documentation to prove you meet it.
- Find out if there is an employment requirement and what kind of work qualifies.
- Pay down your outstanding debts.
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