Why Would a Personal Loan Be Declined? (2024)

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.

Key Takeaways

  • One common reason you would be declined for a personal loan is a poor credit history.
  • Income and the amount of debt you already have can also be reasons a lender may reject your loan application.
  • You can improve your chances of getting approved by increasing your credit score, getting a co-signer, or providing collateral.

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.

Even if you don't have a high DTI, concerns about your ability to handle loan payments on a low income can influence your ability to receive approval for a loan.

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.

Backing up your application with extra tax returns, additional proof of income or assets, and other paperwork might show that you're capable of repaying the loan.

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.

How Soon Can You Apply for a Loan After Being Declined?

In many cases, it makes sense to wait at least 30 days before applying again. This gives you time to address the reason your personal loan was declined. You may want to wait even longer if you have major financial improvements to make to qualify for the loan.

How Long Does a Declined Loan Stay on Your Credit Report?

In general, you can expect a hard inquiry to remain on your credit report for two years, although the impact on your score will be minimal from one loan application. If the lender only performed a soft inquiry, your credit score won't be affected.

Why Can't I Get a Loan if I Have Good Credit?

Even if you have good credit, other factors, such as your debt-to-income ratio and income, might be impacting your ability to get a loan. If your total debt payments are already high, a lender may find it risky to provide you with even more debt. Similarly, if your income is too low, the lender may feel you are at a higher risk of not repaying a loan.

What Credit Score Do You Need for a Personal Loan?

Every lender has its own criteria for personal loans, including the credit score you need. In general, you usually need a credit score at least in the 600s to get approved. However, some lenders will provide a loan even with a score below 600, although the interest rate might be very high.

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.

Why Would a Personal Loan Be Declined? (2024)

FAQs

Why Would a Personal Loan Be Declined? ›

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.

What disqualifies you from getting a personal loan? ›

The reasons for loan denial can vary based on your unique situation. Common factors that prevent you from getting a personal loan can include a low credit score, insufficient credit history, a high debt-to-income (DTI) ratio or requesting too much money.

Why is my personal loan rejected? ›

A low credit score is a frequent cause of Personal Loan rejection. It's a measure of your creditworthiness based on past financial behaviour. To enhance your credit score, pay bills and existing loan EMIs on time, avoid maxing out Credit Cards, and regularly monitor your credit report for errors.

Why am I not being approved for a personal loan? ›

Credit score, income and debt-to-income ratio are the main factors lenders consider when reviewing applications. Paying down debts, increasing your income, applying with a co-signer or co-borrower and looking for lenders that specialize in loans within your credit band could increase your approval odds.

Why is my loan declined? ›

Why do lenders decline credit applications? You might be declined because the lender has decided you don't meet its affordability criteria, which means they think you'll struggle to repay what you've asked to borrow.

What is checked for a personal loan? ›

Most personal loan lenders review your credit score, credit history, income and DTI ratio to determine your eligibility.

How hard is it to get a $30,000 personal loan? ›

Different lenders have varying minimum credit score requirements for a $30,000 personal loan. Generally, a score of 670 or higher is recommended to access better interest rates and terms.

Who is the easiest to get a personal loan from? ›

Easiest-to-get personal loans compared 2024
TitleAPRMin. credit score
Avant9.95% to 35.99%580
LendingClub9.57% to 35.99%600
OneMain18% to 35.99%Undisclosed
LendingPoint7.99% to 35.99%600
6 more rows
Mar 28, 2024

How can I avoid rejection of personal loan application? ›

How to Avoid Rejection of Personal Loan Application
  1. Maintain a low FOIR. While accepting loan applications, lenders assess various criteria. ...
  2. Maintain a High Credit Score. ...
  3. Keep an eye on your credit utilisation. ...
  4. Pay off your credit card dues on time. ...
  5. Show all your income sources.

What credit score is needed for a personal loan? ›

Many give preference to borrowers with good or excellent credit scores (690 and above), but some lenders accept borrowers with bad credit (a score below 630). The typical minimum credit score to qualify for a personal loan is 560 to 660, according to lenders surveyed by NerdWallet.

How to get a loan when everyone denies you? ›

How To Get A Loan When You Keep Getting Denied
  1. Improve Your Credit Score.
  2. Ask Someone To Co-Sign.
  3. Compare Lenders.
  4. Prequalify For A Personal Loan.
Apr 18, 2024

Who is most likely to get approved for personal loan? ›

In general, people who have a FICO® Score 8 or FICO® Score 9 of at least 670 or a VantageScore 3.0 or VantageScore 4.0 of at least 661 are considered to have good credit or excellent credit, which means they may find it easier to qualify for a personal loan.

How do I make sure I get approved for a personal loan? ›

Tip: A stable income, high credit score and low DTI ratio increase the odds you'll be approved for a personal loan. However, some personal loan lenders will consider other criteria, such as your educational background or employment history, when reviewing your application.

Are personal loans hard to get? ›

Personal loans generally aren't hard to get and are available from credit unions, banks, and online lenders. There are various types of personal loans to consider, depending on how much money you need to borrow.

Is it bad to get declined for a loan? ›

Getting denied for a loan or credit card will not be recorded on your credit report, and it will not directly impact your credit scores. To improve the chances that you'll be approved for credit, you may want to take a look at your credit before you apply, and take steps to improve it if you need to.

How often are loans denied? ›

Share: How often does an underwriter deny a loan? A mortgage underwriter typically denies about 1 in 10 mortgage loan applications. A mortgage loan application can be denied for many reasons, including a borrower's low credit score, recent employment change or high debt-to-income ratio.

Do personal loan companies check your bank account? ›

The documentation required for personal loans depends on the lender. Some may ask for bank statements to document your income, while others might only ask for a W-2, 1099, or tax return in order to verify your income.

What is the minimum credit score for a personal loan? ›

Many give preference to borrowers with good or excellent credit scores (690 and above), but some lenders accept borrowers with bad credit (a score below 630). The typical minimum credit score to qualify for a personal loan is 560 to 660, according to lenders surveyed by NerdWallet.

Do loan companies check your bank account for personal loan? ›

In some cases, a lender might ask for your bank account number to know where to send the loan funds after your application has been approved. Some online lenders may ask you to connect a business bank account to analyze and verify your revenues to see whether you qualify for an online loan.

What is the easiest loan to get approved for? ›

The easiest types of loans to get approved for don't require a credit check and include payday loans, car title loans and pawnshop loans — but they're also highly predatory due to outrageously high interest rates and fees.

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