Loan application

Why would lenders reject your personal loan application – and what should you do next?

Being rejected after applying for a personal loan is a major disappointment. Here’s what to do if this happens to you.

When you’re relying on a personal loan to help finance a purchase or consolidate your debt, it’s heartbreaking to find that your loan application has been denied. Unfortunately, this happens to many potential borrowers.

It is important to understand Why your loan application could be rejected – as well as to understand your options on what to do next. This guide will give you an overview of the financial issues that lead to rejection, as well as advice on what to do after a loan rejection.

Why would personal lenders reject your application?

Here are some of the most common reasons a personal lender might reject your loan application:

  • Your credit score is too low: For lenders, your credit score indicates how likely you are to pay your debts on time and in full. If your credit score is low, it may be because you have made financial mistakes such as missing debt payments, because you have not yet established a credit history, or because there are has a harmful error in your credit report.
  • Your income is too low: Lenders won’t let you borrow more than they think you can afford. If you apply for a loan that exceeds your means of repayment, a refusal is inevitable.
  • Your income is too irregular: Lenders also want to be reasonably certain that you will continue to earn enough income to repay the loan over time. If you have just changed jobs and have a long history of irregular income, a lender may be reluctant to give you a loan.
  • You already have too much debt: If you have borrowed a lot of money compared to what you earn, lenders worry that you will have trouble paying back what you owe.
  • You’ve applied for tons of credit recently: Some lenders see this as a red flag when you’ve applied for a lot of new credit in the past few weeks or months. They’re worried that you’re going in over your head, and they don’t want to end up holding the bag if you find yourself unable to meet all of your debt payments.
  • There are inconsistencies in your application information: If you provide income details that do not match the records verified by the lender, the lender may reject your application for fear that you may not be available.
  • The lender cannot verify the application information: Lenders don’t just take your word for it when you provide details of your income or debts. If they cannot verify the financial information you have provided, for example by looking at your tax returns or speaking with your employer, you may be denied a loan.

What to do if a lender rejects your application

When your lender denies your loan application based on your credit history, the lender must provide a “Notice of Adverse Action”. This is a notification that the information in your credit file has been used against you. In this notice, lenders should explain what the problem was and tell you how to contact the credit bureau that provided the information.

If your loan was declined for another reason, lenders will usually let you know what the problem was when you receive your denial notification, but not always. If the lender does not provide the information but you need to understand the exact reason for your refusal, you can try calling and asking, but there is no guarantee that the lender will disclose all details in their decision-making process.

If you know the reason for the loan denial, you can take steps to correct the specific problem. For example, if your loan was declined due to a problem with your credit, you should:

  • Get a copy of your credit report to check for errors and see what negative information has been posted.
  • If there are any errors, dispute the inaccuracies with the three major credit bureaus – TransUnion, Equifax and Experian. An investigation will be conducted and within approximately 30 days a decision will be made. In many cases, inaccurate information will be deleted.
  • Consider contacting creditors to ask them to remove negative information. Creditors don’t have to delete negative information if it’s correct, but if you’ve made a mistake and made a single late payment, you can write a goodwill letter to your creditor and ask if they’d be willing. to do it. If so, it could significantly improve your credit score.
  • Pay off the debt. If your credit score is low because you are using too much of your available credit, paying off some of your debt could cause your score to increase.
  • Work on building credit. If you haven’t had time to build credit yet or have negative information on your report, you can improve your score through responsible borrowing behavior. This includes one-time payments on all of your credit accounts. If you don’t have credit yet, try applying for a secured card or student card so you can start building credit.

If your loan was refused for other reasons, you can try to correct the problem, but the approach you take will depend on the reason for the refusal. You can provide missing information, for example, or submit a new request with more specific details. Or you could work steadily at your current job to develop a stable employment history, or try to supplement your income by taking a side job.

If you need to rebuild your credit, increase your income, or develop a stable employment history, it can take time. You will therefore usually have to wait months or even years before you are ready to apply for a loan again. If you need funding immediately, you can try applying with another lender who may have more relaxed qualification requirements, or you can try applying for a smaller loan that you may qualify for more easily. .

Another option is to try applying for a loan with a qualified co-signer. It’s the fastest way to get approved for a loan after a prior denial, but you need to find someone who not only has good credit, but is also willing to co-sign and share the responsibility. of your debt – and that’s a big ask.

Dealing with a loan rejection

There are many reasons why you may be refused a personal loan – and many steps you can take to respond to a refusal and improve your chances of getting approved in the future. You just need to understand why you were rejected and make a plan to become a more qualified borrower so that you have your pick of lenders the next time you apply.

The Ascent’s Best Personal Loans for 2022

The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.