Why Would a Personal Loan Be Declined?

When you apply for a personal loan, there's a chance that you might be declined. Five of the most common reasons that might prevent you from getting approved for a personal loan include:

1. A poor credit history or low credit score
2. Low income
3. A high debt-to-income ratio (DTI)
4. An unstable work history
5. An inability to meet basic requirements, such as having a bank account

If you get denied when applying for credit, look for ways to increase your chances of approval by boosting 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 must tell you why. 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. Your credit score is a three-digit number that reflects your creditworthiness and ability to repay your debts. Your credit score is calculated based on the information in your credit report.

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 consider your monthly income compared to the total amount of your monthly debt payments.

For example, let's say that you earn $4,000 per month in gross income—or your income before taxes and deductions are taken out of your paycheck.

You have the following monthly payments:

• Mortgage payment: $1,000
• Auto loan: $450
• Credit cards: $300 for all of the minimum monthly payments
  

To calculate your debt-to-income ratio, total your monthly debt payments and divide the result by your gross monthly income as follows:

• Your total debt payments = $1,750 or ($1,000 + $450 + $300)
• Monthly income: $4,000
• Debt-to-income ratio: 44% or ($1,750 ÷ $4,000) * 100

In other words, 44% of your monthly income goes toward your debt. We multiplied the result in the DTI calculation of .44 by 100 to convert the decimal into a percentage.

Lenders typically prefer a DTI of 35% to 40% or lower for personal loan applications. So, while lenders can always make exceptions to this general rule, 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 high enough to handle it.

Unstable Employment or Source of Income

Because personal loan lenders are interested in receiving steady loan payments, they are also interested in ensuring your income is relatively stable.

If you have an unstable employment history or have been unemployed for an extended period, a lender might be reluctant to approve you for a loan. After reviewing your 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.

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 use 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.

The Bottom Line

Although there are various reasons for getting denied when applying for a personal loan, five of those reasons include a low credit score, low income, a high debt-to-income ratio (DTI), an unstable work history, or an inability to meet basic requirements. Before applying for a personal, check the lender's criteria to determine if you will qualify.