What to do if you are refused a loan

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If you applied for a personal loan and your application was denied, you are not alone. Amid rising inflation and the possibility of a recession, many Americans are struggling financially and are looking for help.

Personal loan debt has increased 24 percent since 2021, but the number of borrowers is lower than in 2019. As personal loans grow in popularity and people accumulate more and more personal loan debt, many people find it difficult to qualify. If you have been refused a personal loan, there are several things you can do to improve your creditworthiness and your chances of getting a loan.

To obtain a personal loan, you must meet certain conditions. When lenders decide if they want to lend you and what terms they are willing to offer, they need to establish your creditworthiness and the likelihood of being able to repay the loan.

Some of the key factors that lenders consider when reviewing personal loan applications include:

Credit score range Average APR Average loan amount
720+ 9.81% $18,812.69
680-719 16.01% $15,214.76
660-679 23.54% $11,727.69
640-659 28.93% $9,470.86
620-639 35.98% $7,350.97
580-619 54.17% $5,746.62
560-579 85.24% $4,250.88
Less than 560 135.83% $2,817.03

As illustrated in the table above, people with higher credit scores are more likely to qualify for a lender’s best APRs and highest loan amounts. Essentially, the better your credit, the better your chances of getting a loan on ideal terms.

Additional documents

When looking for a personal loan, you must have several documents in hand before applying. First, you need to submit a loan application. Each lender has a unique application and specific requirements may vary. You usually need to provide basic personal and financial information, the amount you want to borrow, and the reason for the loan. You will also need proof of your identity, income and address.

Reasons Why Personal Loans Are Rejected

There are several reasons why a person may have their loan application rejected:

  • Bad credit history: A bad credit history can tell creditors that you may have trouble repaying what you owe due to past transactions.. Your credit score is generally a good indicator of your credit history, but lenders also look at your financial history to establish your creditworthiness.
  • High debt to income ratio: Your debt-to-income ratio, expressed as a percentage, is the ratio of the income you earn per month to your total monthly debt payments. Lenders use your DTI to determine how likely you are to repay a loan. If you have a DTI of 50% or more, you may have too much debt for a lender to give you a new loan.
  • Incomplete application: Your loan rejection could be as simple as missing documents. If you are rejected for a loan, check that you have fully completed the application and submitted all the appropriate documents.
  • Lack of proof of stable income: Consistency is key, as it helps lenders understand your business landscape going forward. Since jobs can vary by industry, lenders can look at tax returns to get a better overview.
  • The loan does not correspond to the objective: Lenders may have certain restrictions on what you can and cannot do with the loan money. The lender may be able to offer you alternative suggestions to better suit your needs.
  • Unstable Employment History: Lenders like to see a steady stream of income over time. If you’re between jobs or have a history of unstable employment, this could signal to lenders that you may not be a reliable borrower.

What to do in case of refusal

If you apply for a personal loan and your application is denied, there are several things you can do to improve your chances of qualifying next time.

First, you need to ask the lender why your application was denied. Under the Equal Credit Opportunity Act, lenders must disclose the reason for your loan application’s denial, provided you find out about it within 60 days of the decision. This is known as notice of adverse actionwhich is the key to taking action and increasing your chances of getting your next loan.

The main reasons personal loan applications are denied are bad credit, lack of credit history, unstable income, and high debt-to-income ratios.

Review and build your credit score

The most important thing you can do to increase your chances of getting a personal loan is to establish your credit score. If you want to see your credit score without a credit check, use a soft credit inquiry, which lets you see your score and credit history without damaging your credit score. When you check your report, make sure there are no errors. Check that your payments are marked as paid on time if you paid them on time and there are no incorrect balances.

Once you know your credit score and have reviewed your credit report, there are several things you can do to boost your credit. Pay off all your debts on time and keep your credit card balances low to avoid accumulating additional debt. You can also become an authorized user on someone else’s account. This can be useful if that person has a better payment history and low usage rate.

Pay off other debts

Lenders generally look for a DTI below 36%, although some allow applicants with DTIs as high as 50%. If a high debt-to-equity ratio is affecting your ability to take out a loan, work on paying off your current debts before applying for more credit.

One way to do this is to tighten your budget and reduce monthly credit card expenses. Talking to a financial advisor about debt consolidation is also a good idea. A debt consolidation loan could help you reduce your monthly payments by consolidating your debts into a single loan. Ideally, the interest rate on this new loan will be lower than what you were paying before the consolidation.

Look for ways to increase your income

A higher income can help lower your DTI and make you more attractive to lenders. Finding ways to supplement your income could improve your chances of getting a loan. Consider asking for a raise at work, finding another job, or finding side work. Add any household income to your full-time job when re-applying for the loan.

Compare personal loans

Different lenders have different requirements, rates, terms and fees. Research lenders and compare rates before going to any particular one. Which lender is right for you depends on your financial situation and your particular needs. Prequalifying with a few lenders is a good idea to see exactly what you’ll be eligible for before applying. You can get a personal loan from online lenders, banks, and credit unions. Each option caters to people with different incomes, credit scores, and personal life schedules.

Prepare your next application and prequalify

Try prequalifying with a few lenders. Although pre-approval is not a guaranteed approval, obtaining pre-approval means that you have met the initial requirements. Many lenders allow you to prequalify without affecting your credit score or committing yourself. However, pre-approval could be denied if something changes, such as your income or credit score.

When you’re ready to reapply, make sure your documentation is up to date to reflect all the hard work and changes you’ve made. If you’re still unsure if you’ll qualify, try finding a co-signer. This option is not only for people who do not meet the requirements, it can also give them an extra boost to get a lower rate. However, a co-signer is responsible for paying any missed payments.

When to reapply for a loan after a denial

Whenever you apply for a loan or any other type of credit, the credit application appears as a credit application on your credit report, which lowers your credit score. For this reason, it is best to wait a while before applying again. You should wait at least 30 days before applying again, but experts recommend waiting six months to give yourself the best chance of qualifying.

While you wait to reapply, you should work to resolve the reason for your loan denial. Pay off your debts, try to improve your credit score, improve your income if possible, and look for lenders with looser eligibility requirements. If you make payments on other debts during this time, make sure you get the most up-to-date credit reports before submitting another loan application.

The bottom line

Although being turned down for a loan can seem like a big blow, especially if you need the money fast, there are a lot of things you can do to remedy the situation and improve your chances of qualifying the next time you apply.

If you need the money fast and can handle the higher interest rates, there are loans for borrowers with bad credit that tend to have more flexible requirements. However, be aware that you should wait at least a month before reapplying for a loan after being turned down, and that you should only take out a loan if you are sure you can make the monthly payments plus interest and fees. You can also try reapplying for a lower loan amount. The lower the loan amount, the higher your probability of approval.

To improve your chances of getting a personal loan, you can reduce your existing debt and improve your credit score and debt-to-equity ratio.

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