6 Reasons Why Your Personal Loan Application May Be Denied

Personal loans can be quite helpful, especially in emergencies. However, your loan application may be rejected. Understanding the possible causes for the rejection can help you find ways to increase your approval chances.

Here are six reasons why your personal loan application may be denied.

1. Low credit score

Bad credit is one of the reasons your personal loan application may be declined. This is because it tells the lender that you might have had issues paying debts previously. A poor credit score labels you as a risk to lenders, causing them to reject your application or authorize a smaller amount at a high-interest rate. During your loan application review, lenders have the sole mandate to decide whether to authorize the loan, how much to approve and at what interest rate.

Before applying for a personal loan, consider improving your credit score. You can do this by making regular, timely payments, maintaining a low credit utilization, ensuring your credit report doesn’t have errors or mistakes, and more. If you need a loan urgently, you can explore other options, such as express loans, that don’t focus a lot on your credit score.

2. High debt-to-income (DTI) ratio

Your debt-to-income ratio is a percentage of your monthly income (gross) that caters to your monthly debt payments, and lenders use it to ascertain your borrowing risk. It helps lenders measure your ability to repay a personal loan. A high DTI ratio shows lenders that you might struggle with debt repayment. A low DTI ratio indicates an excellent balance between income and debt, which means you’re most likely to manage your monthly debt repayments successfully. The lower your DTI, the better the chances of securing a loan. You can reduce your DTI ratio by raising your gross monthly income or lowering the recurring debt.

3. Low income

Income is a crucial consideration for lenders when reviewing loan applications because they want to ensure you can afford to pay back. This means qualifying for a personal loan with a low income can be challenging. However, the minimum income requirement for a personal loan may differ from one lender to the next. While some lenders may not have a minimum requirement, they may still look at your income to determine if it’s sufficient enough to cover your monthly loan repayments and won’t default. If the lender finds that your income is too low or unstable, they may decline your loan application.

4. Poor payment history

Payment history records your payments on your debts, including credit accounts. It’s an essential element of your FICO Score, constituting 35% of your credit score. While a solid payment history doesn’t guarantee a good credit score, it’s critical to creating a healthy credit profile. Lenders will assess your credit score when reviewing your personal loan application to determine your credit management history. This reassures them that you’re responsible and make consistent, timely payments. Your application will likely be rejected if your payment history isn’t favorable.

5. Lack of the proper documentation

For your personal loan to be approved, you might have to provide financial and personal documentation in the application process. Different lenders have varying eligibility and application requirements. Nonetheless, they might need similar documentation, including your loan application, proof of identity, income and employer verification, and proof of address. They may also need details like loan purpose, monthly expenses, and credit score. Without all the required documents and information, the chances of your personal loan application being approved are meager.

6. Inaccurate information

Your loan application could be denied if the information you provide is inaccurate. Always fill your loan application with correct and accurate details to boost approval chances. Lenders usually verify all the details you provide to ensure authenticity. Your application is automatically rejected if they discover that the information you provided is false or inaccurate.

Your Turn

While personal loans can be helpful, your application can be rejected. Before applying for a personal loan, understand why your application could be denied and find ways to enhance your chances.