There is no shame in being declined for a personal loan — it happens to many people, even those with excellent credit. Don’t give up just because one lender tells you no. Here are some of the more common reasons for personal loan denial and some possible solutions for borrowers.
Possible Rejection Reasons
When lenders decline your application or offer you less desirable terms, they must inform you of the reason within 30 days. Once you receive its “adverse action notice,” you can improve your chances of loan approval. Often you just need to apply with a different lender or choose a different loan.
Credit history
If your credit history is littered with late payments or contains a serious derogatory item, you are statistically much more likely to default (not repay) your personal loan and lenders will probably decline your application.
There are several steps you can take:
- Get a free copy of your credit report and correct any incorrect derogatory entries.
- If you have just one late payment, you may be able to convince creditors to remove it. For a new collection, ask the creditor (in writing) to delete the collection in exchange for you paying it.
- Try another lender.
- Improve your credit by paying on time for at least six months and try again.
- Add a co-signer to your application.
Once you have your personal loan, pay it on time every month. Good payment history can improve your credit report and score in a few months.
Debt-to-income (DTI) ratio
Your DTI is the relationship between what you earn and what you spend. The higher your DTI, the greater the risk to your lender.
Your DTI equals your monthly housing payment plus the prospective payment for your personal loan and accounts like credit cards, auto loans, student debt, etc. — but not living expenses like food and utilities. Divide this total by your monthly gross (before tax) income. If you earn $4,000 per month and your payments are $2,000, your DTI is 50%. That’s about as high as most lenders will approve, and some set their maximum DTI much lower — 36% is typical.
- If one lender rejects you, apply with one that allows higher DTIs.
- Reduce the effect of the new loan by choosing a longer repayment term or a lower loan amount.
If credit card debt is the problem, request a larger loan and consolidate your credit card debt. That might reduce your DTI. Your lender can run the numbers for you to see if that works.
Patchy employment history
Lenders want to know that your income is stable and ongoing. If you spent six months as a personal trainer, took several months off, and now you’re selling real estate, lenders may doubt your ability to repay a loan.
- A co-signer can be helpful in this situation if you are otherwise eligible for financing (credit history and DTI).
- If you can tie your jobs together (similar responsibilities, same industry), or show increasing money or responsibility with different jobs, write a letter of explanation for the underwriter.
- Try providing several years of tax returns and a letter of explanation if you can show that your income has been stable or increasing for several years despite job-hopping.
The least “forgivable” job changes are those that take you from salaried to commissioned, salaried to self-employed, or to a field in which you have no experience. Avoid those before applying for a loan.
Income below minimum threshold
Personal loan providers examine your DTI when you apply for a loan. But most of them also set a minimum income. The reason for this is that with a low income, you have very little wiggle room if you experience an income interruption or a financial emergency.
Minimum income thresholds can vary widely among lenders. One national lender sets its minimum at $12,000 per year, while another puts its minimum at $45,000 per year.
Unfortunately, many personal loan vendors do not disclose their minimum income thresholds. If you’re concerned about minimum income, seek out lenders that disclose their minimum income requirements or make a point of asking before you apply with any lender.
Lack of paperwork
Personal loan providers don’t just take your application and hand you money. You have to back up the income you disclose on your application. Underwriters may request additional items after reviewing your file, including:
- Letters of explanation for credit problems
- Divorce decrees to show child or spousal support payments
- Business licenses for self-employed applicants
- Bank and brokerage statements
- Canceled rent checks
If you don’t supply everything the lender needs within 30 days of application, you’re likely to receive a notice of denial due to an incomplete application. Note that this can even occur if a third party doesn’t respond in time — if, for instance, your landlord or employer fails to return a request for rental history or employment verification.
You can head this off by promptly submitting every document and every bit of information the lender requests. It’s probably a good idea to check in and make sure that the underwriter is not waiting for anything. If a third-party verification is outstanding, contact the party and ask them to return it to your lender ASAP.
Credit score too low
Most lenders set a minimum credit score for loan eligibility. If your credit score falls below this number, you won’t get a loan. You can have a perfect credit history and a low credit score for a couple of reasons — you don’t use credit enough or you use too much.
Having too little credit history makes it difficult for lenders or credit reporting agencies to see how you manage debt. And your credit score will reflect that, unfair as that may seem. The other reason you can have a low score is high credit utilization. If you use more than 30% of your available credit, your score takes a hit. And if you’re close to being maxed out, you’ll see a major decline.
Fortunately, a personal loan can solve both of these problems. Find a lender with a lower minimum score or no minimum score requirement. Get a small personal loan and pay it on time. Adding perfect payment history on an installment loan can do great things for your credit score. And if you have high utilization, paying off your credit cards with a personal loan “resets” your utilization to zero because it only includes revolving accounts like credit cards.
Don’t give up!
There is no shame in being declined for a personal loan. Personal loan providers specialize in different types of borrowers and loans, and the right lender for you is probably waiting for your application.
