Most Common Reasons for a Loan Decline

For many individuals, using a personal loan can help provide financial relief during a time of need. But what happens when, in your time of need, you’re denied that relief? Being turned down for a personal loan can no doubt feel discouraging.

And while it may be difficult to accept at first, don’t let the rejection of your loan application defeat you. The truth of the matter is approval is never guaranteed and it’s a common scenario that many people face. 

The best thing you can do is to understand why your loan application was declined and how you can improve your financial situation for a better chance at a loan approval. To help you get started, here are some of the most common reasons for loan denials:

1. Bad Credit History

When it comes to loans—whether it be a mortgage, car, or personal loan—credit history is often the number one factor that lenders consider when reviewing applications. Your credit history demonstrates to lenders how responsible you are in repaying debts and provides them with an idea of how likely you are to be able to repay your loan on time. 

So, suppose you’ve experienced credit hiccups in the past, such as late payments, accounts sent to collections, or even bankruptcy. In that case, your credit score was likely negatively affected, hurting your chances of being approved. 

2. High Debt-to-Income Ratio

Another important factor is your current debt-to-income ratio. This ratio is calculated by dividing your total monthly debt payments by your gross monthly income. For example, if your total debts equal $2,000 a month and your gross income is $6,000 then your debt-to-income ratio would be 33 percent ($2,000 / $6,000 = 33%). 

Lenders use this ratio to measure your ability to manage your monthly financial obligations. Adding a personal loan payment on top of your existing debt will only increase your financial obligations, so if you already owe thousands in credit card debt, some lenders may be hesitant to approve your loan request.

3. Thin Credit File

As we just mentioned, having a high debt-to-income ratio can negatively impact a loan application, but did you know that not having debt can be just as impactful? Confusing, right? Individuals with limited or no credit accounts or history listed on their credit reports are known as having a “thin credit file.” In fact, there are roughly 62 million Americans who currently hold this status. 

How could this impact your application? Without an established credit history on file, lenders are unable to see a history of payments made. This means that they have little to no baseline from which to determine if you’ll be responsible enough to repay your loan on time. Consequently, lenders will be more reluctant to approve your application. 

4. Employment History

For lenders, seeing consistency in an applicant’s income provides a level of comfort. After all, they want to know that you’re going to have the financial means in place to repay what you borrow. 

Having inconsistent gaps or frequently changing employers can indicate to lenders that your income may be unstable or be prone to fluctuating. This can raise a red flag and cause lenders to deny your application. 

5. Missing or Inaccurate Information

Loans often require applicants to submit several forms of both personal identification and financial documentation, including proof of employment, government-issued identification, and relevant income information such as tax returns, pay stubs, or bank statements. 

Missing just one of these essential elements or having a discrepancy in your information can negatively impact your application. This is especially true if you completed your application online. A simple typo on crucial details such as your social security number or a mismatch between street addresses can be enough to trigger a denial.

If you recently applied for a loan and your application was denied for any of the above reasons, here are some actions you can take to help improve your chances of being approved in the future. 

  1. Request Your Decline Notice If your application was denied, lenders are legally obligated to provide you with an adverse action notice that states the reason(s) why your application was rejected. Knowing exactly why your application wasn’t approved will help you better understand the areas you need to focus on to improve your financial situation.
  2. Review Your Credit Report
    If something on your credit report was the reason for denial, now’s a good time to review your report to check for any errors or inaccuracies. And if you do find something that shouldn’t be there, be sure to dispute it immediately with the credit bureau.
  3. Work on Your Credit Score
    If your debt-to-income ratio was a contributing factor, focus your efforts on paying down any outstanding debt. Eliminating $1,000 or more in your debt can significantly help lower your ratio.
  4. Establish Your Employment History
    If you were new to your job when you first submitted your application, try waiting until you’ve hit at least the one-year mark before applying again. Establishing longevity in a job can help demonstrate to lenders your financial stability and ability to make payments.
  5. Correct Any Outdated Information
    If there were any discrepancies regarding your personal information, you’ll want to get them cleared up immediately. Whatever the case, correcting the problem sooner rather than later will help ensure it doesn’t resurface again in the future.

Improve your odds of getting approved for a loan. Contact us at Credit Direct to get help navigating the loan application process—our dedicated team of loan agents are available to help answer any of your questions. You can also apply online to check qualified offers in minutes with no effect to credit score.

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