Personal loans can be a great way to borrow money in certain circumstances, especially if you need to finance a large purchase or consolidate higher-interest debt. While many lenders offer personal loans for all types of borrowers, it’s not a guarantee you’ll be approved if you apply for one. Let’s take a look at a few reasons you might be turned down, and what you can do to get approved the next time you apply for a personal loan.
1. Your credit
Many personal loans are unsecured, which means there is no collateral for the lender to take possession of if a borrower stops making payments on the loan. A secured loan, on the other hand, is “secured” by collateral. Two big examples of secured loans are mortgages and auto loans. If you stop paying one of those, you could lose your home or car.
Lenders offering unsecured personal loans often have stringent credit score requirements, since they need to rely on your credit history to decide whether you’re likely to repay a loan. Payment history reflects 35% of your FICO® Score, and it makes sense that this factor would be so important — the biggest concern of a lender of any kind is whether the applicant will pay back what they borrow. So if your credit score isn’t looking so hot, that could certainly be why you were turned down for a personal loan.
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2. Your income/employment situation
Another factor that tells lenders you can manage the payments on a loan is your income and employment situation.
If you’re hoping to borrow a much larger amount of money than you could comfortably afford to repay on your salary, it may give lenders pause about approving your application. Similarly, if you’re unemployed or only work part-time, it might be difficult to get approved.
3. Your current debt load
Finally, a lender will consider your debt-to-income ratio to decide if you’ll be approved for a personal loan. Your DTI measures how much of your income goes to debt payments, and is expressed as a percentage.
For example, let’s say you bring home $4,000 per month and your debt payments amount to $1,600. In this instance, your DTI is 40% ($1,600 divided by $4,000, multiplied by 100). If you already have a lot of debt payments every month (and a high DTI), you might not be able to manage another loan on top of them — definitely a reason you might be turned down for a personal loan.
How can you get approved next time?
Having a loan application denied is disappointing. Here’s what you can do to maximize your chances of approval the next time you apply.
Improve your credit score
Paying off debt is an incredibly effective way to boost your credit score. But that may not be possible for you at this stage, especially if you’re hoping to get a loan to consolidate existing debts and save money on interest.
But you can make a renewed commitment to pay your creditors on time (remember, payment history makes up 35% of your FICO® Score) and get a copy of your credit report. Scan it for errors (which are common; a third of volunteers found errors on their credit reports in a Consumer Reports study). If you find any, you can ask that they be removed, which should also help your credit score.
Apply with the right lenders — and shop around
Not all lenders work with people of all credit scores. Thankfully, The Ascent has lists of lenders we like that are a great fit for different personal finance situations:
No matter your situation, talk to multiple lenders and see what interest rates you’re offered. This is the best way to get approved and find the cheapest loan possible.
Some lenders allow you to apply for personal loan pre-approval, and this is worth doing. The lender will do a soft pull on your credit (which doesn’t impact your credit score), and you can find out your chances of being approved for real. If the odds aren’t good, you can find a different lender.
If you were turned down for a personal loan, chances are, one of these reasons is to blame. Take a close look at your finances and credit score and make some improvements for next time. Good luck!