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Getting denied for a personal loan can be disappointing. However, it doesn’t necessarily mean that there’s nothing you can do. Understanding why you were denied — whether it was related to credit issues, income requirements or incomplete paperwork — may help you make changes and move toward loan approval.
Let’s explore several common reasons why a personal loan application might be denied and discuss the actions you can take after a loan denial to help turn things around.
Here are some common reasons why a personal loan application may be denied:
Borrowers with lower credit scores may encounter personal loan denials more frequently. This is because personal loan lenders will typically use credit scores as a way to assess applicants’ ability to repay a loan. Lenders may have certain credit requirements, such as a minimum credit score, that you have to meet to qualify.
Issues like a thin credit file or a low credit score may lead to a denied personal loan application.
Applying for a personal loan involves a lot of paperwork. If some of that information gets lost in the shuffle, that may lead to a denied application. Understanding what information the lender requires is key. Be sure to review your application before sending it off to ensure you’ve filled everything out correctly. If you’re confused about any part of the application, you may also consider contacting the lender for clarification.
Your DTI ratio compares your total monthly debt obligations against your income. Lenders use DTI ratios to help determine if you can afford to repay a loan. If your DTI ratio is too high, that could set back your personal loan plans. DTI ratio requirements can vary by lender. In general, lower DTI ratios are more favorable.
Lenders may reject your personal loan application if they deem your income insufficient or unstable. From the lender’s perspective, a borrower with unreliable income has a higher chance of defaulting on the loan (which happens if you stop making payments) when the monthly payments become unaffordable.
Basic requirements vary among lenders. In general, your application may be denied if you don’t meet these 3 basic qualifications:
If your personal loan application gets declined, there may be things you can do to improve your chances the next time you apply.
Lenders are required to provide a decline notice that explains why your application was denied. If your application was denied due to credit score, that notice will include your credit score and the credit scoring agency that provided your credit information. Review this notice and identify what needs to be addressed before you resubmit your application.
If the loan decline notice cited issues with your credit, you may want to request a copy of your credit report to figure out the problem. You are entitled to a free credit report every 12 months from each of the 3 major credit reporting companies, and they’re offering free weekly reports. If you find that there are errors, you can dispute those with the applicable credit reporting agency, as well as the company that provided that faulty information, to get them removed from your credit report.
If you have a thin credit file or a low credit score, you may need to take time to build your credit before applying for another loan. Some of the steps you may take include:
When you’re ready to start applying for personal loans again, look for pre-qualification. That can help you understand if you’re likely to qualify for certain personal loans, and provide insight into what your terms might look like, without harming your credit1.
Lenders can deny loan applications if the requested loan amount is deemed to be too high, given the applicant’s income and credit score. In that case, asking for a lower loan amount may help you qualify for a personal loan in the future. Evaluating your funding needs can help you figure out if lowering your loan amount is a viable option for you.
Your existing debt is another important personal loan factor that lenders use to help determine if you can repay a new loan, so paying it down may help you qualify in the future. This can also help improve your DTI ratio, making you look more creditworthy as a borrower, and free up more monthly income to repay a new loan.
You may consider using the debt snowball method to help you accomplish this task. With this approach, you pay off debts from smallest to largest. Conversely, the debt avalanche method involves paying off the highest-interest debt first before paying off the next highest- -interest debt. While the avalanche method could help minimize interest costs, the snowball method offers short-term wins that could keep you motivated over time.
It may be wise to wait several months before reapplying for a loan following a denial. That’s because it often takes time to increase your income and improve your financial situation. There is 1 key exception here: If your loan application was declined because of an error you made on the application, however, you should contact the lender immediately to address the mistake and rerun the application.
There isn’t a set number of times you can apply for a personal loan. However, keep in mind that each application adds a hard credit inquiry to your credit report. Each of those can negatively impact your credit score. Having several hard inquiries in a short period of time can also have a bigger impact on your credit score. If possible, use pre-qualification to help you find lenders that are more likely to accept your application without harming your credit1.
Getting declined for a personal loan does not show up on your credit report or impact your credit by itself. The biggest concern is the hard credit inquiry that occurs when you apply.
1. To check for offers you may qualify for, Citi conducts a soft credit inquiry. If you are presented with an offer and choose to proceed with the application process, Citi will conduct a hard credit inquiry which may have an impact on your credit score.
This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
