What to do if you are denied a loan
If you’ve applied for a personal loan and your application has been denied, you’re not alone. With rising inflation and the possibility of a recession, many Americans are struggling financially and are looking for help.
Personal indebtedness has increased 24 percent since 2021, but the number of borrowers is lower than in 2019. As personal loans become more popular and people accumulate more personal loan debt, many people are struggling to qualify. If you’ve been denied a personal loan, there are a few things you can do to improve your credit score and your chances of getting a loan.
In order to get a personal loan, you must meet certain requirements. When lenders decide whether to grant you a loan and what terms to offer, they need to determine your creditworthiness and the likelihood that you will be able to repay the loan.
Some of the most important factors that lenders consider when reviewing personal loan applications include:
|Credit Score Area||Average APR||Average Loan Amount|
|Less than 560||135.83%||$2,817.03|
As shown in the table above, People with higher credit scores are more likely to qualify for the best APR and the highest loan amounts from a lender. Basically, the better your credit rating, the greater the chance of qualifying for a loan with optimal conditions.
If you are looking for a personal loan, you should have several documents on hand before applying. First you need to apply for a loan. Each lender has a unique application and specific requirements may vary. Generally, you need to provide basic personal and financial information, the amount you want to borrow, and the reason for the loan. You will also need proof of identity, income and address.
Reasons for personal loan rejection
There are several reasons why someone may have their loan application declined:
- Bad credit: A bad credit history can indicate to creditors that you may have trouble paying off your debts based on previous transactions. Your credit score is generally a good indicator of credit history, but lenders also look at your financial history to determine your creditworthiness.
- High debt to income ratio: Your debt-to-income ratio, expressed as a percentage, is the ratio of your monthly income to your total monthly debt payments. Lenders use your DTI to determine how likely you are to repay a loan. If you have a DTI of 50 percent or more, you may have too much debt for a lender to give you new credit.
- Incomplete application: Your loan denial could be as simple as missing paperwork. If you are rejected for a loan, double check that you have completed the application and submitted all required documentation.
- Missing proof of regular income: Consistency is key because it helps lenders understand your job landscape going forward. Because jobs can vary by industry, lenders can view tax returns to get a better understanding.
- Credit does not match the purpose: Lenders may have certain restrictions on what you can and cannot do with loan money. The lender may be able to provide you with alternative suggestions that better suit your needs.
- Discontinuous employment history: Lenders want to see a steady stream of income over time. If you’re between jobs or have a history of inconsistent employment, this could indicate to lenders that you may not be a reliable borrower.
What to do if you are rejected?
If you apply for a personal loan and are denied, there are several things you can do to improve your chances of getting a loan next time.
First, you should ask the lender why your application was denied. The Equal Credit Opportunity Act requires lenders to disclose the reason for denial of your loan application if you inquire within 60 days of the decision. This is known as Advice on adverse measureswhat is the key to taking action and increasing your chances of qualifying for your next loan.
The main reasons for denial of personal loan applications are bad credit, poor credit history, unstable income and high debt-to-income ratio.
Check and build your credit score
The number one thing you can do to increase your chances of getting a personal loan is to build your credit score. If you want to see your credit score without a hard credit check, use a soft credit request, which allows you to see your credit score and credit history without affecting your credit score. When reviewing your report, make sure there are no errors. Check that your payments are marked as paid on time if you paid them on time and that there are no incorrect balances.
Once you know your credit score and have checked your credit report, there are several things you can do to build your credit score. Make all debt payments on time and keep credit card balances low to avoid piling on additional debt. You can also become an authorized user on someone else’s account. This can be helpful if that person has a better payment history and low usage rate.
Pay off other debts
Lenders typically look for a DTI below 36 percent, although some will allow applicants with DTIs as high as 50 percent. If a high debt-to-income ratio is affecting your ability to borrow, work on paying off your current debt before applying for another loan.
One way to do this is to tighten your budget and reduce monthly credit card spend. It’s also a good idea to talk to a financial advisor about debt consolidation. A debt consolidation loan could help you reduce your monthly payments by consolidating your debt into one loan. Ideally, the interest rate on this new loan will be lower than what you were paying prior to consolidation.
Look for ways to increase your income
A higher income can help lower your DTI and make you more attractive to lenders. Finding ways to supplement your income can improve your chances of getting a loan. Consider asking for a raise at work, looking for another job, or finding a part-time job. Add any household income to your full-time employment when reapplying for your loan.
Compare personal loans
Different lenders have different requirements, prices, terms and fees. Research lenders and compare interest rates before applying to a specific one. Which lender is best for you depends on your specific financial situation and needs. It’s a good idea to pre-qualify with a few lenders to see exactly what you’re eligible for before applying. You can get a personal loan from online lenders, banks, and credit unions. Each option caters to people of different incomes, credit scores, and personal life plans.
Prepare for your next application and pre-qualify
Try to pre-qualify with some lenders. Although pre-approval is not a guaranteed approval, obtaining pre-approval means that you have met the initial requirements. Many lenders allow you to pre-qualify without affecting your credit score or incurring any obligation. However, pre-approval could be denied if something changes, e.g. B. Your income or credit rating.
When you’re ready to reapply, make sure your records are up to date to reflect all the hard work and changes you’ve made. If you’re still not sure if you qualify, try finding a co-signer. This option isn’t just for people who don’t meet the requirements – it can also give people an extra boost to get a lower interest rate. However, a co-signer is responsible for paying any missed payments.
When to apply for a loan again after a rejection
Every time you apply for a loan or any other type of credit, the loan application appears as a loan request on your credit report, lowering your credit score. For this reason, it is advisable to wait a while before applying again. You should at least wait 30 days Before applying again, however, experts recommend waiting six months for the best chance of qualifying.
While you wait to reapply, you should work to resolve the reason you were denied credit. Pay off any debt, try to improve your credit score, increase your income if possible, and look for lenders with more relaxed eligibility requirements. If you’re making payments on other debts during this time, make sure you get the most current credit reports before submitting another loan application.
The final result
While being denied a loan can feel like a big blow, especially when you need cash fast, there are many things you can do to rectify the situation and improve your chances of qualifying on your next application.
If you need money fast and can handle the higher interest rates, there are loans for bad credit borrowers who have more relaxed requirements. Note, however, that after a refusal you must wait at least a month before you can reapply for a loan, and you should only take out a loan if you are confident that you can make the monthly payments plus interest and fees. You can also try to reapply for a smaller loan amount. The lower the loan amount, the higher the probability of approval.
The best way to improve your chances of getting a personal loan is to reduce your existing debt and improve your credit rating and debt-to-income ratio.