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Man reading why his Loan Application May Be Denied

Reasons Your Loan Application May Be Denied

Loan applications can be denied for a number of reasons, including bad credit history, unstable employment history, the minimum income requirement not being met, missing information, and a high debt-to-income ratio. If this happens, there are a few things you can do to improve your chances of being accepted next time. 

Bad Credit History 

When applying for a loan, you can be sure that the lender is going to look at your credit history. It’s one of the number one factors they consider, and the main way they evaluate if you are going to be able to repay the loan, which is why it will be one of the number one reasons that many people get denied when applying for a loan. 

Your FICO score is what most lenders will use when evaluating if they will give you a loan, and applicants with good credit scores, at 670 or above, will have a higher chance of being approved. 

Most lenders will have a minimum credit requirement, and if you have had issues in the past with your credit, such as collections, bankruptcy, and past due accounts, it will heavily affect your score and therefore result in your loan application possibly being denied. 

How Can I Fix This?

What can you do if your loan was denied for bad credit? Take a look at your credit report and see if there is anything on there that you can dispute.

There have been cases where someone else’s information was included in someone’s report, which can easily be fixed by a dispute. Additionally, closed accounts could possibly be shown as negative, which would negatively impact your score. 

Everyone has the right to dispute inaccurate information on your credit report, and you can do it yourself for free. If you do not want to do it yourself, you can always pay a credit repair company to do it for you. 

You should also check for signs of identity theft. Watch out for accounts you don’t believe you opened, or even any credit applications you know you did not submit. These could all hurt your credit, but you can easily dispute it with all three credit bureaus. 

Another reason your credit history could be bad is because of late payments. Make sure that you are caught up, and that you continue to stay caught up. These marks could stay on your credit for up to seven years. 

Debt-to-Income Ratio

Say your credit score and credit history are okay, but you have a lot of debt that your income doesn’t match up with. This could also be a reason your loan was rejected. 

Your debt-to-income ratio is the sum of your debts divided by your monthly income. If this is too high, lenders may not want to lend to you and will reject your loan application. 

How Can I Fix This?

There are not too many short-term strategies to change this, but you can start by trying to increase your income. The more your income is, the lower your debt-to-income ratio will be, therefore making it more likely that you will meet the minimum requirement by the lender you are going through. 

One of the simplest ways of doing this is to pick up a side hustle or learn an in-demand skill that will boost your income. 

Another way to fix this is to pay off, or at least pay down high-interest debts. If you do this while also maintaining a higher income, this will dramatically change your debt-to-income ratio, and therefore give you a much larger chance of being approved for a loan. 

Minimum Income Requirement Not Met

Speaking of income, lenders will often ask you for proof of income. This is to verify that you will be able to pay back the amount of money that you borrow. Most lenders have a threshold for this. If you are denied, it may be because you do not meet the minimum income requirement for the loan amount you are asking for. 

How Can I Fix This?

One simple way to try to be approved after being denied for this is to try to apply for a lower loan amount. When applying, make sure that you include all the income you collect, including child support payments, investment accounts, and even side gigs. 

Unstable Employment History 

In order to make sure that you will be able to make your payments each month after being approved for a loan, lenders will often look at how stable your employment history is. They want to make sure that the income you have is consistent in the hopes that it will continue to be going forward. 

If you have recently changed jobs, work freelancing, have multiple employers, and have different paystubs, it may create an issue with the lender’s calculations. 

If you are self-employed, it doesn’t mean that you will always be rejected. Ask your lender if they would be willing to look at tax returns in order to compare income over a longer period of time. 

Loan Purpose 

Even when applying for a personal loan, which is generally way more flexible than other types of loans, like car loans, different lenders may not allow you to use their loans for things such as investments, college tuition, or anything that could be partially illegal. 

How Can I Fix This?

When reapplying for your loan, make sure that the purpose listed for the loan matches your actual purpose for applying. If you are trying to get a personal loan for a class, maybe looking into getting a type of school loan will bring you better luck. 

Missing Paperwork

When applying for a loan, you may have to fill out some paperwork depending on what the loan is for, and who you are trying to get it through. 

Most loans will require employment history, proof of income, which could consist of pay stubs, tax returns, or bank statements, your ID, your credit report, and sometimes even documentation about collateral that you may have to put up in order to obtain the loan. 

If you happen to miss any of the required information they ask for, they may reject your loan completely. 

How Can I Fix This?

When you first apply for a loan, make sure that you are submitting all the necessary paperwork they are asking for. If you were rejected once, make a checklist, and double-check to make sure that every single thing is accounted for before submitting again. Sometimes it is always better to submit too much paperwork, than too little. 

Lack of Credit History

If you are rejected for a loan because you lack credit history, it is because a lender cannot tell if you will be able to pay back the loan based on your credit history alone. If this is the case, consider becoming an authorized user to someone like a spouse or a parent. 

It helps if this person has good credit history… and an extensive one. 

Another option is for you to apply for a secured credit card. This will allow you to make a deposit and borrow against it. These limits are not usually high but paying it will boost your credit score every month. 

Things To Do After Being Denied 

There are numerous other things you can do to increase your chance of being approved for a loan. 

Read your Denial Notice

The first thing you will want to do after being denied is to review the decline notice. This is going to give you a better understanding of why you were rejected in the first place. This notice will come shortly after the rejection, considering lenders are required to send an adverse action notice containing the reasons for the denial. 

This will be helpful to you since if you were denied because of something in your credit, the notice will let you know what aspect of your report led to the decline and the credit bureau that reported it.

Consider Applying for a Smaller Loan

Another thing that you can do after being denied is to consider applying for a smaller loan amount. This will seem less risky to lenders and will up your chances of being approved. Although this may not be optimal for you when needing a loan for something specific, it could be better for you in the long run. 

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