Having a loan denied is frustrating and disappointing. You may not understand why it happened or what you can do to make sure it doesn’t happen again.
Unfortunately, you’re not alone. According to a recent study, 21.8 percent of applicants were refused credit in 2023, the highest level since June 2018.
So, what’s going on? Your lender may send you an adverse action notice stating precisely why you’ve been denied. Otherwise, these are the top 10 reasons you keep getting denied for loans and what you can do to prevent it.
1. You Didn’t Meet the Minimum Credit Score Requirement
One of the most common factors lenders used to assess your loan application is your credit score. If you don’t meet their minimum credit score requirement, you’re immediately rejected for a loan.
Regrettably, many lenders want to see a credit score of at least 640. However, that’s not written in stone. You just need to find a lender that accepts a lower credit score or one that places more emphasis on other factors, such as your income. If you don’t know your credit scores, you can access them for free online.
What To Do
If you keep getting denied for loans, your credit scores could definitely be the culprit. As a result, it makes sense to do whatever you can to improve them. This may include correcting errors on your credit reports. The information used in these reports are the basis of your credit scores. Get free copies of your credit reports from Esperian, TransUnion, and Equifax at AnnualCreditReport.com.
Carefully review the information in each of them to ensure they are accurate and up-to-date. Errors do occur. Luckily, the Consumer Financial Protection Bureau explains what you should look for specifically. If you find mistakes, file a dispute with the particular credit reporting agency.
When everything looks right, you will want to maximize your scores too. Start by understanding how your credit scores are calculated. Legitimate negative entries on your reports may be less impactful if you pay off collections and bring delinquent accounts current.
Alternatively, you can apply through a lender that places less emphasis on credit. For instance, FlexMoney offers some of the best Missouri online installment loans available, but they do not have a minimum credit score requirement. If you earn a steady recurring income paid by direct deposit, you may qualify.
2. Short or No Credit History
Lenders look at your credit history, because positive information makes you less risky and the lender is more willing to grant you a loan.
However, some applicants get their loan denied because they have little or no credit history. Building credit takes time, but it may feel impossible to achieve that if no one will give you a loan. Luckily, if this applies to you there are several things you can do.
What To Do
If you’ve never had a personal loan, you may want to apply through a company that places less emphasis on your credit. Your credit history accounts for up to 15% of your overall credit score, so choosing the right lender could be the tipping point towards approval. Anything less than 2 years is considered a short credit history.
Even if you’ve had other forms of credit such as a credit card or line of credit, an installment loan is another cup of tea. In this case, definitely seek preapproval through several other lenders that emphasize income, not credit. It won’t affect your credit score and you can usually get a response within minutes.
3. You Don’t Meet the Lender’s Basic Requirements
Every lender uses their own criteria to determine whether or not you qualify for a loan. If you don’t check these beforehand, you could keep getting denied for loans. Here are some of the basic qualifications for a loan you can expect:
- Legal age in the state
- Valid Social Security Number or Individual Taxpayer Identification Number
- Active bank account with an American financial institution
- Valid email address and telephone number
- Solid source of income
However, some lenders are definitely stricter than others. For instance, some have a minimum income requirement. Others won’t consider income earned from sources other than regular employment.
What To Do
If you have decent credit and you can’t understand what’s going on, you may not meet the lender’s basic requirements. Do your homework before you fill out an application form.
Good lenders list their basic qualification requirements on their website. Alternatively, contact customer service and ask them for this information. Knowing what they want to see can ensure you’re not wasting your time. Always choose a lender that uses the preapproval process.
4. You’re Carrying Too Much Debt
If you carry more debt than your income can support, lenders consider you risky. They commonly calculate your debt-to-income ratio (DTI) for a quick snapshot of your creditworthiness. Ideally, your DTI should be under 40% for a personal loan, but much less is far better. You can calculate yours here.
What To Do
Repeatedly saying, “I keep getting denied for loans” without addressing your underlying debt problem means you’re ignoring the root issue. You must reduce your debt or increase your income to alter your DTI. In some cases, you may be able to lower the interest rate on what you owe, which reduces your payment amount. However, paying down your debt is inevitable so start there.
5. Incomplete or Incorrect Information
We live in an electronic world and most lenders rely heavily on technology. This means lenders can access information on you almost instantaneously, especially if you’re applying for loans online.
Consequently, it is very important that you review your application carefully for accuracy and completeness. If you purposefully or inadvertently supply the lender with the wrong information, including failing to reveal debts, they will deny your application.
Even if you’re pre-approved for a loan, the lender will almost certainly check your credit prior to final approval. Applying for another loan during the process will also show up and could result in a loan denied. Private debts such as child support and alimony may not appear in your credit history, but they could show up elsewhere on your reports. Be honest!
Omitting banking information can also lead to a rejected loan application if the lender uses it in lieu of paper documents. Failing to upload bank statements for income verification can also mean a loan denied.
What To Do
Many lenders allow you to reapply if you made an innocent mistake. However, it is important to know how they review your credit beforehand. Multiple credit inquiries can lower your credit scores. Always choose a lender that uses a preapproval process and a soft credit inquiry. This does not impact your credit score.
Additionally, be certain to maintain a regular banking routine. Don’t make random transfers or deposits once you begin the loan process. The lender wants to see predictable paychecks into your bank account and they prefer direct deposits.
6. Unstable History
Many lenders want to see a stable work, banking, and residence history since it suggests reliability and lower risk. Consequently, those changing jobs, moving, or switching banks may be rejected for a loan. That’s regrettable, since sometimes people do these things for very good reasons.
What To Do
If you have changed jobs, moved, or switched banks recently it makes sense to choose a lender that’s less worried about stability. Some lenders are content with as little as three months, while others want to see years. If you don’t know what the lender expects, ask them before you apply.
7. Wrong Loan Type
Personal loans can vary greatly. As a result, lenders tend to focus on specific purposes to meet specific needs. Consequently, it is important to choose the right loan type.
What To Do
If you need a loan for home improvements, look for a lender that specializes in the loan type. If you want a loan to buy a new flat screen television be certain the lender does not have usage restrictions. Many will not lend for education, starting a company, moving, and more. Always choose a lender that matches your need.
8. You Asked For Too Much Money
Personal loans are available for up to $100,000, depending on the lender, your state, credit history, ability to pay, and other factors. Nonetheless, applying for more than you need is often one of the reasons banks deny loans.
Sometimes the lender won’t be willing to lend you a large amount of money the first time, even if you qualify. However, they may be willing to lend you more once you establish a track record with the lender.
Alternatively, some lenders will ask you for collateral to support the loan. Others may ask for a co-signer who can support repayment of the loan. However, the most likely result is a rejected loan application.
What To Do
Only borrow what you need. Don’t tack on an extra amount “just in case”. Otherwise, you can see your loan denied repeatedly.
Do a serious financial review and come up with a reasonable figure before you fill out your application form. Don’t ask for extra, ever. You have to pay it back with interest and the inflated amount could lead to a loan denied.
9. You Applied at the Wrong Time
Perhaps you’re going through a rough patch in your life and you need extra money. That could be a divorce, legal battle with a business partner, or even a health issue. Regrettably, any of these could impact your credit.
Perhaps your assets are caught up in divorce proceedings and you’ve overused your credit. Maybe your business partner obtained a settlement which resulted in a judgement on your credit report. You could even end up paying huge medical bills since your insurer denied your claim.
Additionally, interest rates can rise which increase payment amounts. This increase could lead to rejected for a loan.
What To Do
Plan ahead. Obtain copies of your credit reports and place a statement on them explaining a particular negative event such as a judgement. If you are expecting you’ll receive money within months, you can note that on your reports too.
Optimize your credit scores, and choose several potential lenders that use the preapproval process. Remember, preapproval usually does not affect your credit scores. If you apply online, you can get a reply in minutes. Gather your banking, income, and personal identification information beforehand.
10. You Have an Alternative Income Source
Most lenders lend to those with regular jobs. If you are a freelancer, contractor, or business owner, you don’t fall into this category. However, that doesn’t mean you can’t get a loan. You may just need to do more preparation.
Those earning money through a pension, disability payments, or other sources can definitely obtain a personal loan if their DTI supports it.
What to Do
For contractors paid by regularly by direct deposit, you may be able to qualify like any other applicant, providing you have a stable work history. Freelancers and business owners that earn a more erratic income may need to provide extensive documentation such as an income statement over several years.
Those earning money through a pension, disability payments, or other sources will need to show regular direct deposits into their bank account. They will also need to choose a lender that accepts alternative incomes sources.
The Bottom Line on Loan Denials
If you’ve been denied for a personal loan, it probably isn’t the end of the road. Optimize your credit reports and credit scores and then look for several lenders with appropriate qualification criteria. Be certain to choose ones that specialize in the loan type you need and offer a preapproval process. Otherwise, it can negatively impact your credit scores.