You just received some bad news. Your personal loan application was rejected.
Such news can feel devastating. Especially if everything seemed to be in order, and you were relying on this money to pay for something important in your life.
Getting denied for a loan is never a pleasant feeling, especially if you're low on cash. But it's critical that you understand exactly why you were rejected so you can fix any mistakes and have better success the next time you apply for a personal loan.
This guide isn't only for people who were previously rejected. It will also benefit anyone who is thinking about applying for a personal loan or a bad credit loan.
If you keenly read through this list before you apply, you can reduce your chances of getting rejected. So regardless of your situation, I'm confident that you'll benefit from this knowledge.
Here are the top 11 reasons why personal loan applications get rejected.
1. Mistakes on Your Credit Report
Could there really be a mistake on your credit report? Absolutely.
This is much more common than you might think. In fact, research shows that more than 20% of credit reports have an error. There could be a wide range of potential mistakes on your report.
For example, maybe your address is wrong or not updated. This may not necessarily hurt your score, but a lender could look at it like you provided them with wrong information.
But more importantly, some reports have errors that have a direct impact on bringing credit scores down. I'm referring to things like:
- Paid bills being reported as unpaid
- Closed accounts being displayed as open
- Late payments
These are all potential factors that can contribute to your loan application getting rejected.
So my recommendation is this. Know your credit score. Check your credit report and look for any errors. If you find mistakes, you can dispute them and try to get them removed for accuracy.
Once this matter is resolved, you'll have a better chance of qualifying for a personal loan without a rejection.
2. You Don't Have Enough Credit History
Having no credit isn't the same as having bad credit. But unfortunately, they can both hurt your chances of getting approved for a loan.
Take a look at the factors that determine how your FICO credit score is calculated.
As you can see, the length of your credit history plays a role. But if you don't have open lines of credit, the other factors will be impacted as well.
If you're young and don't have any credit cards, mortgages, car payments, or other previous loans, lenders don't know if you're reliable enough to pay back what they let you borrow. It's kind of a catch-22.
A comparison is like when you're trying to get your first job, without any work experience. But you need the job in order to get work experience.
The same concept is applied here. You need good credit to get approved for a loan, but you need to be approved in order to build good credit.
So if your credit history is thin, applying for a loan right now probably isn't your best bet. You need to build credit first.
I'd start by simply applying for a credit card. This could be a challenge as well, and you may even need to apply for a secured card through your bank, which requires a cash deposit. Despite that drawback, secured cards are a good way to steadily build up credit if you have none.
Once you get approved for a card and made several payments on time, your credit score will go up and it will reduce the chances of getting rejected when you apply for a personal loan.
3. You Don't Own Any Assets
Traditional loans are unsecured, meaning the lender allows you to borrow money without any collateral. This usually isn't a topic of discussion for people with excellent credit.
However, if your credit score isn't great or you don't have much of a credit history, then you'll have a better chance of getting approved with a secured loan.
This type of loan allows you to borrow against your assets, like a car or house. In the event that the loan can't be repaid, the lender will seize those assets.
But if you don't own assets, or don't have enough equity in those assets, this could be a problem for you when it comes to getting a loan with bad credit.
Furthermore, if you know your credit isn't great and yet you applied for an unsecured loan, that could be the reason why you were rejected. So if you have some assets to borrow against, apply for a secured loan to improve your chances of getting approved.
4. Your Debt is Too High
Most people have some type of debt.
Whether it's student loans, mortgages, car payments, medical bills, or credit cards. Lenders understand this.
But if you have too much debt, it can be a red flag and be the reason why your application was rejected. Here's a look at the top ten states in America with the highest percentage of citizens in debt.
So if you fall into this category of people with high debt, you need to try and pay it off or at least pay it down as much as possible.
This is especially true for your high-interest credit cards. Making the minimum monthly payment each month isn't going to help you when the time comes you need a new loan.
Personal loans are a great option for debt consolidation, which is something you may want to consider if you're overwhelmed by multiple high-interest debts. But with that said, if you owe too much money, you may not qualify. Or at least you won't find one with reasonable interest terms.
So before you apply for a personal loan, try to settle or at least pay down your existing debt.
5. Asking For Too Much Money
Loan applications can get denied if the requests are too high. I recommend only applying for the amount that you actually need.
If you've got lots of debt, no assets, and a poor credit score, it's unlikely that you'll get approved for a $40,000 loan. But if you approach the lender with a more reasonable request, like $5,000, they will be more inclined and willing to work with you.
So don't just pull a number out of thin air.
Research exactly how much you need and have a plan for how you're going to pay it back. The lender wants to know how they'll get their funds back, plus the interest charges. But we'll discuss that in greater detail shortly.
6. No Proof of Stable Income
As I just said, the lender wants to know how their loan is going to get repaid. So you'll need to provide documentation about your current job and work history.
If you're not working right now, it can be a challenge to get your application approved. Even if you do have a job, how long have you worked there? What were your previous jobs?
Lenders want to see job security.
If you've only been at your most recent place of employment for the last three months, that's not necessarily considered stable. Especially if they see that you've had four jobs in the last two years with big gaps of unemployment between each one.
So before you apply for a loan, get your job situation in order first. The longer you've been working at one place, the greater the chance your loan application will get approved.
Provide proof of your income with recent pay stubs as well as tax documents, like W2's and 1099 forms.
7. You Applied for the Wrong Loan
You may qualify for certain loans, but not all of them.
So look at the terms and requirements before you apply. You'll be able to eliminate some right away. For example, lots of loans have a minimum credit score requirement. If you apply for one and your score is below that threshold, you'll get rejected automatically.
This could have easily been avoided if you checked the requirements ahead of time. As I said before, you need to know your credit score.
You can find online resources to get your credit score for free. Some of your credit cards may offer this service to you as well. Check back on a regular basis, since scores can fluctuate.
In addition to your score requirements, there are certain loans designed for specific instances. Take a look at some of the top reasons why people apply for a personal loan.
So let's say that you need money for tuition. You'd need to apply for a student loan as opposed to a debt consolidation loan.
8. Applying for Too Many Loans Simultaneously
Applying for personal loans isn't a game of averages. Trying as many times as possible with the thought that at least one of them will get approved is not going to help your cause.
In fact, it's going to have the opposite effect and it could be the reason why you got denied. Let me explain why.
Every time you apply for a loan, an inquiry from that lender gets places on your credit report. So when the next lender checks your report, they'll see other recent inquiries. This is a red flag.
They'll wonder why you would be looking for multiple loans. This makes you appear risky to the lender. If you're going into debt with multiple lenders, they may not think that you can repay the amount that you're asking for.
You shouldn't have more than one loan request in a 6 to 12 month period. This statement holds true for other forms of credit as well.
Let's say you just got a new credit card last month. You also opened up a new line of credit with a retail store, like Macy's, a couple of weeks after that. Now you're applying for another new credit card. All of these inquiries will show up on your report.
9. Unfavorable Payment History
Lenders love it when they see borrowers make payments on time. It shows that you're responsible and can pay off your debt.
But if you've got a history of late payments, it increases the chances that your application will be rejected.
These are all factors on your credit history that make lenders nervous.
So here's what you can do to correct that. Settle any outstanding balances. Then get a credit card and start making payments on time and in full. After you do that for a year or two, go back and request a personal loan.
You can explain to the lender that you made mistakes. But now you've learned from them and made the corrections. Your most recent credit history will show that.
10. You Applied With the Wrong Lender
For those of you who have had bad credit or no credit, applying for a personal loan at the first bank you happen to walk past by will probably be a mistake and lead to a rejection.
Do some research and look for alternative solutions. For example, you may want to find an institution that offers personal loan options with a co-signer.
Another option for you to consider could be a credit union. They have favorable loan terms for borrowers, especially if you belong to a certain group that's affiliated with the credit union.
You may also want to consider getting your loan online. Check out peer-to-peer lending sites. Those investors are used to giving loans to people with bad credit.
So just do your research and make sure that you explore all of your options before applying with the first lender you find or the first one who knocks at your door.
11. Mistakes on Your Application
It's possible that you made a mistake on your application.
So when the lender goes to verify your information, they may see some conflicting results. This can cause them to reject the application. Even if it's an honest mistake, it could hurt your chances of being approved.
But with that said, if you intentionally lie on your application, it's going to be pretty much an automatic denial.
For example, let's say you embellish your annual salary, just to make it seem like you have plenty of money to repay the loan. But then when the lender asks you for proof and documentation of your income, you're caught.
Not only will you get rejected for this loan, but it will hurt your relationship with that lender and you could likely get denied again if you apply with them in the future.
How to Reduce Your Chances of Getting Rejected
Before you apply for a loan, I urge you to reference this guide.
Know your credit score. Check for mistakes on your credit report.
Build up your credit history and only apply for loans that you qualify for. Make sure that you're asking for a reasonable amount.
Double check your application for mistakes and never lie to a lender.
If you've already been rejected and you don't know why, refer back to this list and see what you might have done wrong. Correct your mistakes and you'll have a better chance of getting approved the next time you apply.