Did you know that over 19 million people in the United States of America have a personal loan? Getting a personal loan is important when you’re trying to purchase something like a home or a car or even trying to refinance high-interest debt. It is difficult and confusing when you apply for a loan and it is denied.
It is natural to want to know the reasons loan declined and to want to know the loan declined next steps so you can move forward. There are a number of reasons why your loan application got declined so it is important to know “why is my loan declined” and what to do when loan declines.
The good news is that you’ve come to the right place to learn about the common reasons for loans declining as well as what to do to avoid loan declining. Continue reading for more.
Reasons You Were Declined For Personal Loan
One of the common reasons for having a loan declined is that you possess a poor debt to income ratio. The good news is that if one lender declines your loan application, there is always the option of going through a different lender and hoping for better results. Each lender has its own set of requirements that it goes off of when deciding to accept or decline a loan.
If you find that your loans are getting declined, it is a good idea to step back and assess why your loan was declined and what you can do in order to help get it approved. If your loan is declined and you’re not sure what to do it is a good idea to reach out to the lender for feedback.
Here is a look at the top three reasons why your loan is declined and how to move forward from each.
1. Credit Score Is Too Low
One of the first things that a lender looks at when reviewing your loan application is your FICO credit score. The FICO credit score helps tell lenders how good you are at managing your money. From that information, they can determine if you’re a safe person to lend or invest money into.
The things that factor the most into your FICO credit score are your payment history and the amount of money that you owe. With personal loans being unsecured debt, there is a lot more risk involved in lending the money. Lenders abide by strict lending requirements since there is no collateral put up for the money they lend.
The good news is that lenders will normally post the minimum credit score that they’re willing to work with. It is a good rule of thumb that if your credit score is below the minimum you’ll have an uphill battle to secure a loan. If you get a loan with a poor credit score then you’ll face higher interest rates on that loan.
The best approach to should take to avoid loan declining because of credit score is to improve your credit score before applying. The two biggest factors when it comes to credit score are money owed and payment history followed by credit history length and new credit activity.
A good approach to take is to get a copy of your credit history and dispute any errors you find. You should also set up automatic bill paying to avoid making late payments or missing payments. Another helpful thing to do is to pay down all of your credit card debt.
2. Debt-to-Income Ratio Is Too High
Another one of the most common problems people run into when applying for a personal loan is that their debt-to-income ratio is too high. This ratio works by comparing the amount of monthly debt you have to the amount of monthly income you receive. If you have $2,000 in debt you’re paying each month but you’re making $4,000 then your debt-to-income ratio is 40 percent.
A high debt-to-income ratio points out to lenders that you could have a difficult time paying back the money you’ll owe them on the loan. The best approach to take is to have a debt-to-income ratio in the neighborhood of 35 percent or lower. This signals to lenders that you’ll have no issue paying back the money you owe.
If your debt-to-income ratio is too high, the best approach to take is to either increase your income or pay down your debt. You can increase your income by getting a second job. There are also great ways to pay down your debt like the debt snowball or debt avalanche methods. Click here to learn more.
3. You Tried To Borrow Too Much
Another one of the most common reasons that loans get declined is because you tried to borrow too much money and the lender doesn’t feel comfortable that you’ll be able to repay it. The lender looks at your other debt obligations as well as your income and if they feel you’re not able to repay the debt then they’ll decline your loan.
It is likely because the lender doesn’t feel like your net income after your other debts are enough to afford your monthly payments on the loan. The best solution when this occurs is to request a loan for a smaller amount. Create a budget and use a loan calculator to get an estimate on how much money you’ll be able to afford in loan payments each month.
From there you’ll have a clearer picture of how much you can pay in loan payments each month and you’ll improve your chances of getting your loan accepted.
Get Your Personal Loan Approved Today
There are a number of reasons that a loan application gets declined but it is important that you ask the lender for more information. Asking for more information allows you to assess what was wrong with your application and take steps to improve the aspects that the lender deemed insufficient.
There are plenty of ways you can improve your credit score and debt-to-income ratio to qualify for a great personal loan.
For more helpful and informative articles, be sure to check out the rest of our blog today.