Loan Declined? 8 Reasons Why And How To Recover Step By Step
Loan Declined? 8 Reasons Why And How To Recover Step By Step
by
December 23, 2022
So you've just been denied a loan, and it's not the best day. But don't worry — you're definitely not alone in this situation. According to recent studies, at least 12% of all Americans who apply for loans are denied (that number goes up to 36% for those with poor credit scores).
However, just because you were denied doesn’t mean it’s the end of the world. In this quick guide, we'll talk about a few reasons why your loan was rejected as well as how to recover and get back on track so that you can get the financing you need with confidence.
So don't give up hope yet; let's explore eight reasons why your loan might have been declined and what strategies you can use to get approved next time around!
What Is a Personal Loan?
A personal loan is a type of loan offered by banks and other lenders to individuals for personal use. Personal loans are typically unsecured, meaning that they don't require collateral as security in the case of a default.
Instead, personal loans use the financial and personal history of the borrower to determine the amount, rate, and terms of the loan. These loans can be used for any purpose from consolidating debts to home renovations and larger purchases.
Although personal loans charge interest on the borrowed amount, they offer flexibility for borrowers and often have fast approval rates.
Loan Denial Reasons: 8 Reasons Why Your Loan Was Declined
The description above might make it seem like personal loans are easy to get. However, as mentioned, millions of people are denied personal loans each year (and for varying reasons). If you’ve recently been denied a personal loan but aren’t entirely sure why here are a few factors that might have led to your loan being declined.
1. Low Credit Score
Having low credit scores can put your chances of being approved for a loan in jeopardy. Why’s it such a big deal? Having low credit scores means that institutions and lenders may not trust that you can make payments back on time, so they could deny your loan application.
Basically (and unfortunately), the lower your credit score is, the more financial institutions will become less likely to approve your loan application. However, it’s important to remember that poor credit scores don’t automatically lead to a loan decline, but low scores definitely lower the chances. Good credit management can help improve a low credit score and increase the chances of getting an approved loan in the future.
2. High Debt-to-Income Ratio
A high debt-to-income (DTI) ratio is an indication to lenders that a borrower may not be able to make payments on a loan. When the DTI is high, it means that the amount of debt payments to income are high and could lead to difficulty in repaying the loan due to current financial obligations.
If your DTI exceeds certain thresholds, such as more than 43% for certain government-backed loans, then lenders may deny the loan application or offer a high-interest rate. The easiest way to fix this? Pay off high-interest debt as quickly as you can or increase your income with side hustles.
3. Didn’t Meet Income Requirements
Meeting personal loan income requirements is essential in obtaining a personal loan; without it, the chances of getting denied increase significantly. Typically, these requirements involve having a regular job with an income that can support the monthly payments associated with the personal loan.
Creditors will assess your ability to service the personal loan and whether or not such a loan fits into your long-term plans. Since personal loans require either minimal collateral or none at all, meeting minimum personal loan income requirements gives creditors peace of mind that their investment is safe and secure.
4. Unstable Employment History
Unstable employment history could lead to a loan denial as lenders look for stability when making their decision. A lack of consistent employment history may cause them to not take the risk, as they will view unstable employment history as a sign that an applicant may not be able to make reliable payments on time.
Lenders also look at income stability since unstable employment can mean your income is unstable or undependable (which plays into the loan denial reason above). The bottom line is that if an applicant has gaps in their work history, lenders will be more cautious and may choose to deny the loan should the information look unreliable.
5. Loan Amount Too High
Applying for a loan is an important step towards achieving your financial goals, but requesting too much money can lead to a loan decline.
When requesting a loan, lenders want to make sure that you’ll be able to pay back the amount within a certain period of time. This means that if you ask for more than you are financially capable of repaying, then it's likely that the lender will deny your application.
The remedy for this? Consider your financial situation and make sure you’re requesting a reasonable amount of money before submitting your application.
6. Inaccurate Loan Details
Inaccurate loan details can lead to a denial of a loan application for a number of reasons. These inaccurate details may include:
- Inaccurate or incomplete employment history
- Inaccurate asset verification
- Inaccurate income figures
This inaccurate information will affect the lender's ability to assess your creditworthiness and could lead to either a rejection or delay in the decision-making process, so double-check that all of the information provided is up-to-date and accurate.
7. Recent Bankruptcy
A recent bankruptcy can mean serious financial issues that a lender may be taking into consideration when deciding whether or not to approve a loan. How recent are we talking about here? When it comes to bankruptcy, lenders want to make sure you’ve managed their finances responsibly for at least two years following the filing date.
If there is still evidence of recent debts, neglected payments, or defaulted loans, this could indicate to the lender that you may not have reorganized their finances properly following bankruptcy and therefore would be a high risk in lending you money.
8. Application Errors
Finally, sometimes a loan denial comes down to simple errors on the application form. After all, if you make mistakes when filling out documents such as credit forms, it may prevent a lender from accurately evaluating your ability to repay the loan.
As such, application errors may result in a denied loan application or unfavorable terms such as higher interest rates or stricter regulations. That’s why it’s so important to take care when completing these documents to ensure they are correct and up-to-date; otherwise, it could lead to poor results when finding financing.
How to Recover After a Loan Denial
Now that you know some potential reasons why your loan was denied, it’s time to take a look at how to recover from that denial.
The steps you need to take will ultimately depend on why your loan was denied, but regardless, these tips should help you boost your credit score across the board.
1. Rebuild Your Credit
Rebuilding your credit doesn't happen overnight; it takes patience and commitment. However, if you're motivated to improve your financial position, there are steps you can take to rebuild your credit so you don't get denied a loan.
First, obtain copies of your credit report. Check that the information is accurate and dispute any errors. Then, work to reduce existing debt by making timely payments on all bills each month. When possible, pay more than the minimum required payment as this will help reduce debt more quickly.
Additionally, apply for only one or two new accounts and use them responsibly. This includes paying off those accounts before the due date each month and managing your balances so that you don't exceed 30% of their limit.
By following these tips, building a strong credit history is achievable and may result in being approved for a loan in the future.
2. Pay Off Debts
Paying off debt isn't just important for your financial well-being: it could also make or break a loan application. Without paying off existing debts, lenders are unable to assess your risk profile and may immediately deny the loan.
Therefore, showing evidence of past payments can demonstrate financial responsibility and trustworthiness in making future payments. Likewise, paying off your debt shows lenders that you understand the consequences of taking on too much credit and have responsibly managed those debts in the past.
The result? Increased chances of loan approval.
3. Prequalify for a Loan
Prequalifying for a loan can greatly increase your chances of approval the next time you apply for a personal loan. It's an effective way to get an idea of how much money you will be eligible to borrow and see whether or not it fits within your budget. Prequalifying also helps you avoid taking on debt that is too expensive for you to realistically repay.
When prequalifying, you provide lenders with information about your income, assets, and debts so they can gauge the level of risk associated with lending you money and decide if they want to approve your loan.
4. Get a Cosigner
Not only does having a qualified cosigner provide reassurance and added credibility, but it also shows that you have access to additional resources and financial support. Having a cosigner with strong credit who will guarantee your loan is an excellent way of increasing your chances for approval.
In addition, their participation reflects responsibility on the part of both yourself and the cosigner, which could result in more favorable terms with the lender. The best part? A cosigned signature is not only an assurance of payment to the lender; having one also has the potential to help you score lower interest rates and better repayment options.
Get the Cheers Credit Builder Loan
Are you ready to access the personal loans and rates you deserve? If your credit score is what’s leading to having a loan declined then look no further than Cheers! Our credit builder loan lets you apply for loans from as low as $500 over 12 or 24 months.
With our autosave feature, we do the heavy lifting and report your payment history every month. Reap all the benefits and get your hard-earned savings sent directly back into your bank account at the end of the term.
Don't get declined for a loan in 2023. Instead, get a credit builder loan with Cheers and watch your financial dreams come true. Click here to apply now.
