Surprisingly, it’s not uncommon for personal loans to be declined. LendEDU’s data in 2018 revealed that 76 percent of people’s personal loan applications get rejected. But, there’s no need to panic, and try not to worry too much.
We’re aware that facing financial issues is extremely daunting, and your loan application getting denied is just a candle on top of the cake. But in all honesty, it’s not the end of the world, as you need to know a loan rejection shouldn’t define you as a person.
Let’s try to understand the science behind why people get declined for a personal loan and what can be done to avoid being rejected in the future.
Table of Contents
- 1 Identify the Cause of Denial
- 2 How to Recover from a Loan Rejection
- 3 Conclusion
Identify the Cause of Denial
There are a set of qualifications to meet when you’re applying for a personal loan. If by any chance, you fall short of those qualifications, you’ll likely be declined. However, that in no way means that you’re not financially responsible or smart enough.
It simply means, there are certain financial adjustments that can be made in order for you to meet the criteria to get a loan approval.
Moreover, just because you received a rejection for your loan application, it in no way means this has to be your last chance at getting a loan. However, let’s identify the reasons that led to your loan being declined.
Bad Credit History
Banks and lenders analyze and go through your credit history when you’re applying for any type of loan. Your credit history is the most important factor your lender will consider. Lenders aim to see a solid history of your previous loan repayments and borrowing.
Your credit history will allow your lender to evaluate how likely and timely you’ll repay your monthly instalment. If you do indeed have credit hiccups such as collection, past due accounts or bankruptcy, your credit score might not meet the lender’s requirements.
Once the lender senses a significantly negative item on your credit report, they are likely to determine that your loan is perhaps too risky to give approval at this time.
Some things that could affect your credit history are:
- Late previous loan repayment
- High credit card balances
- Delinquent payments
- Not enough credit history
- Too many recent credit inquiries
However, your loan can also be declined if your credit score doesn’t meet the lender’s minimum requirement. In order to avoid this from happening again, you need to know your credit score and try shopping around for loans that meet your credit range.
If your loan is rejected, you will most likely receive an adverse action letter explaining the reason as to why your loan was rejected. It’s mandatory by the law, for you to receive a free copy of your credit report in case of a rejection.
If by any chance you don’t receive your credit report, you can still contact your credit reporting agency mentioned on your declination letter to request for your report directly.
Income is another primary factor that affects the status of your loan application. If your lender indeed rejects your loan application on your income, there are likely two reasons for it:
- Your income doesn’t meet the minimum requirements. Unfortunately, a lot of lenders rarely publish this information, so it’s not easy to know if your income is a a certain level to get a loan approval
- Your debt-to-income ratio (DTI). If your DTI is too high, you’ll more than likely have your loan declined. You can divide your monthly debt repayments by your monthly gross income, in order to see how high, balance or low is your DTI.
The maximum DTI you can have ultimately depends on what type of loan you are applying for and also varies from one lender to another. However, if it’s high, your lender will be unsure if you can keep up with all of your loan repayments, hence the denial.
One thing you should and can do to get an approval the next time around you send in a loan application, is try working on paying off some of your debts, as it’ll show a positive DTI.
Lack of Collateral
When you’re applying for a small business loan, the lender will have a look at your business credit. However, if your business has yet to establish a snuff fic net credit, the lender will then look at the owner’s personal credit history.
In all honesty, unless you as a business owner are willing to place you personal guarantee fro the loan or pledge your personal assets that are valued as a collateral for the loan amount, the chances of you elan application getting approved are slim without a business credit.
If you feel there are mistakes made by lenders at the end on your credit report, please do contact the credit referencing agency on your credit report. They should be able to run a thorough investigation, and further correct the details that were found to be incorrect.
If there’s an instant that any specific organization simply refused to change the information provided by them, but you genuinely feel that the information entered is incorrect, you can further include a notice of correction with paces to write your comments on the mistakes.
Other Reasons for Loan Denial
While your credit history and income are the main factors lenders mainly consider, they obviously don’t tell you the entire story. You may further be denied due to many other reasons such as residence stability, employment history, and liquidity or cash flow problems.
How to Recover from a Loan Rejection
Having received a loan rejection letter, is like a punch to the gut, especially if this wasn’t your first one. Moreover, it’s even more upsetting when your plans to renovate your place or consolidate a debt have been delayed.
Instead of getting immensely discouraged and taking the rejection personally, try using it as a motivation to further build your credit and increase your income, so that you receive an approval the next time round.
Here’s how you can recover for a loan rejection.
Build Your Credit
In order to have a good and impressionable credit history, it’s important to keep your credit balance as low as possible and make your debt payments diligently on time. These are two main ways in which you can build your credit, however don’t just stop there.
You should also:
- Go over your credit reports for possible errors: Common overlooked errors such as payments being incorrectly labeled as “late payment” or delinquent, and a wrong balance on your accounts, have chances of hurting your credit score. You can dispute credit report errors via their website, by phone or in writing.
- Apply for a credit-builder loan: Instead of directly giving you the borrowed money, lenders will hold the amount in a specific bank account whilst you make timely payments towards the loan.
Your repayments will then be reported to the credit bureaus, which in turn helps you in building your score. However, you’ll only get the money after you’ve made all the due payments.
Credit-builder loans are available through community banks, Community Development Financial Institutions and credit unions.
- Be an authorized user on another individual’s credit card: Ideally, you should be an authorized user on a person’s credit card, who has a steady payment history, and they report their authorized users to all the credit bureaus.
Grow Your Income
A higher income will greatly lower your DTI ratio, and will in return raise your chances of qualifying for a loan. Asking your boss for a pay raise might not be that much of an easy task, but there are a few things you can still consider doing.
For example, try taking up a side job like tutoring or ubering, in order to add a few extra hundred dollars to your income. Hence, when you reapply for the loan, make sure to include all sources of income on your loan application form.
You should also add your spouse’s income, child support, income being generated from an income, military or alimony.
Make a Significant Down Payment
If you’re paying small amounts of monthly down payment on your house or car, try considering paying at least 20 percent of the purchase price of either your house or cal. This might help you in getting an approved loan.
Moreover, you’ll also be borrowing less, which means your monthly installments will be lower. Alos, lenders always feel risk free with a borrower who has a lower loan-to-value ratio. Your loan amount will be compared to the appraised value of your possession, to evaluate your loan-to-value ratio.
Hence, the lender may be willing to extend the loan to you even though you don’t have the ideal credit.
Get a Co-signer
If your credit score or income didn’t meet the set of requirements to get a loan approval, you may have a better chance if you added someone else’s credit and income to your application – assuming their credentials are better than yours.
Basically, a co-signer is an individual who applies with you and has agreed to become the person responsible for repaying your loan. However, if you fail to repay, your blender will not just go after you, but your co-signer as well.
Your co-signer’s credit score will therefore also suffer. Hence, only use a co-signer who not just agrees but understands the consequences that come from taking on this risk.
The lender that rejected your loan application, is not the ONLY lender out there. A rejection speaks to one lender’s opinion on your financial profile. Of course, it’s noteworthy information, but another lender might view your application from a different point of view, and may even approve it.
If you sincerely believe that your financial profile is as steady as you make it, you shouldn’t wait to reapply after a denial. Approach another lender and end your loan application to them. Perhaps try a credit union or a local bank, and try checking with online lenders too.
Speak to Your Lender
If you’re still unsure why your loan was rejected, and feel there was nothing amiss from your financial profile, speak to your lender before reapplying, in order to receive an insight from them as to where the main problem lies.
They’ll gladly have a session with you, in which you’ll be explained as to what matters and what doesn’t, and how long you should wait before reapplying. If your loan was rejected by a small and local institution, it’ll be easier to speak with a lender.
This will help you better prepare yourself before filling out another loan application.
Confirm Your Loan Purpose is Allowed
Despite the fact that personal loans are flexible and can be used for several things, not every other lender allows you to use the loan for just about anything. For example, your lender might not allow you to use your loan for your business or secondary education expenses.
Remember to approach your lender to know whether the reason in your loan application is valid.
If your loan application is in fact rejected a number of times, don’t make that a reason to give up. We’ve shared a number of things you can do in order to improve your financial profiel before you reapply.
Some of you may not require much effort like clearing up their credit report. However, others who need to build a clear credit file, will indeed require both time and patience.
Ultimately, these approaches will definitely help you in becoming a better loan candidate,and further improve your odds in getting an approval in the future.