Couldn’t buy your dream or settle a debt because your loan application keeps getting denied. We know how it feels and leaves you demotivated and dejected. A loan application is denied for multiple reasons, such as a bad credit history or an incomplete application.
But don’t worry; we are here to break down the reasons for you and help you improve your chances next time. Some minor tweaks to your finances and boom, a ‘your loan application has been approved’ message will pop up on your screen.
Reasons for Personal Loan Rejections
Don’t be in a rush to reapply; first, pinpoint the real reason for rejection. Lenders often reject personal loans because of bad credit history, low credit score, and unstable income.
Incomplete Application
A lender can deny your loan application for the slightest mistake, like forgetting to add ‘0’ to your birth date. The margin of error is razor-thin when filling out the application form, so double-check everything before submitting the application.
Bad Credit History
Credit history is one of the most important things lenders look at before giving loans to borrowers. If you have a credit history with hiccups, it is a big red flag and the most obvious reason for lenders to deny your personal loan application.
High Debt-to-Income Ratio
The debt-to-income (DTI) ratio lets lenders know the money you spend on paying existing debts and what’s left over. A DTI higher than 40% is a warning sign, and lenders simply put your application in the trash.
Unstable Income
If you are enjoying the high life for one month and struggling to meet the ends the next month, congratulations, you fall under the category of people with unstable income. And Lenders don’t trust your kind. A steady cash flow is your way to get a personal loan.
Borrowing Too Much Money
If you have stacked debt like Pokemon cards, lenders will surely refrain from giving you any more loans. It’s like your plate is already loaded, and you are asking for more with an empty pocket. You need to show lenders that you have finances under control to get the approval.
How to Improve Your Chances of Loan Approval?
If there is a problem, there is a solution, period. Here is a guide to help you improve your chances of getting approved for a personal loan.
Improve Your Credit Score
Start by improving your credit score. Pay your bills on time, curtail your credit utilization, and become an authorized user on your friends or family’s accounts. You must have patience, as it might take some time to cover the damages; remember, it’s a marathon, not a sprint.
Lower Your Debt-to-Income Ratio
Empty your plate! To bring down the DTI, pay off your outstanding debts. Take a smart approach: Pay off the small debts first, followed by the big ones. You can also keep extravagance under control and stack extra cash for repayment. The lower your DTI, the higher the chances of lenders saying, “Your loan is approved.”
Add a Co-Borrower or Co-Signer
Teaming up with someone who has a better credit score is another way to avoid loan rejection. A co-borrower or co-signer is your safety vault, showing lenders that your back has been covered in case things go South.
To avoid conflict, clear terms with your co-signer and clearly mention what they are signing up for. A family member or close friend is best suited for the role.
When to Apply For a Loan Again?
Once your loan application is denied, you need to relax and rest a bit. Repeatedly knocking on lenders’ doors hurts your credit score and lands you in their bad books.
Many lenders have pre-qualification facilities. Under this, you get to know your chances of getting your loan approved. Moreover, the lender will brief you about the loan amount, interest rate, and repayment schedule before you take the final call for applying or not. The best part of pre-qualification is that it doesn’t affect your credit score.
If you are confident of nailing it this time, let things cool down and apply after the 90-day window has gone by.
Alternatives to Personal Loans
Getting your personal loan denied can leave you feeling blue, but it’s not the end. There are alternatives to personal loans that will give you the quick cash required for home renovation or to pay off outstanding debts.
Home Equity Loan
You can opt for a home equity loan if the situation is fire. It allows you to borrow against its value. But be very careful because it is your home at stake, and if you can’t repay, you might end up on the streets.
Title Loan
Got a ride? It can be the key to arranging the cash. You can keep it as collateral to get some quick bands. However, always remember the stakes are high.
Buy Now, Pay Later Loans
BNPL plans are perfect for making purchases. It allows you to break down your payment into small chunks, usually without additional charge or interest. However, you need to hold back your inner shoppers and avoid overspending.
Cash Advance App
The cash advance app is another great alternative to fill the financial void. They allow you to borrow money from your next paycheck but charge you in terms of subscription fees.
Pawn Shop Loan
Have antiques or precious collections? Hit a pawn shop right away. They are your best bet for quick cash without any paperwork. Be clear about the interest rate and repayment schedule before finalizing anything. Make sure you repay without any delay; otherwise, your valuables can become a showpiece on someone’s shelf.
Frequently Asked Questions
Qs. Will a denied loan application hurt my credit score?
Well, a rejected loan application doesn’t affect your credit score unless you get multiple rejections in quick succession. Moreover, a hard inquiry by a lender can cause a slight dip in your credit score as it stays on your credit report for at least two years.
Qs. How can I find out why my loan application was rejected?
It’s a lender’s job to inform the applicants about the reason for rejection. You are likely to receive a notice stating why they rejected your loan application; if not, you can reach out to them within 60 days of rejection.
Qs. Can I reapply with the same lender after being denied?
Yes, you can, but don’t rush in. Before reapplying, figure out the reason for rejection and fix the issue. Reapplying instantly with the same lender is likely to get your rejection again. Some lenders also have a policy where you cannot apply within 30 days of rejection.
Qs. Can I get a loan with bad credit?
Some lenders can provide you with a personal loan despite having bad credit. But they charge a hefty interest rate. Instead, you can go for alternatives to personal loans like title loans, cash advance apps, and pawnshop loans.
Qs. Do all lenders have the same approval criteria?
Not at all!! Each lender has its own approval criteria. Credit score, debt-to-income ratio, and monthly income are some factors that lenders take into consideration, but the weightage they place on each factor varies.
Qs. How long should I wait before reapplying for a loan?
If you end up with your loan application denied, it’s best to reapply after 90 days. However, each lender has its own reapplication criteria and window. You can check with them to know the exact period.
