12 Reasons Your Loan Application Was Denied

Did you receive an email or a notice in the mail reading: Loan Application Denied? Well, you are not alone. It happens.

Loan applications can be denied for several 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. 

Key Takeaways

• Credit score issues, recent credit problems, and high debt-to-income ratios are common reasons to be rejected during the loan application process.
• Addressing credit report inaccuracies, managing debt effectively, and ensuring realistic loan amounts are actionable solutions if the application is rejected.
• Reviewing denial notices for insights, taking measures to improve credit, and ensuring thorough documentation in subsequent loan applications are actionable items post-denial.

Blog Contents

1. Credit Score Isn’t High Enough
2. Recent Credit History or Bankruptcy
3. Debt-to-Income Ratio Is Too High
4. Employment History Isn’t Consistent
5. Qualifying Income Isn’t Enough
6. Debts Weren't Disclosed
7. Risk for the Lender Is Too High
8. Your Application Has Errors
9. Bad Timing with Life Events
10. Subjective Rejection from the Lender
11. Amount You Requested Is Too High
12. The Application Was Incorrect or Incomplete

Why Are Personal Loans Denied?

Saying to yourself, "I keep getting denied for loans, what's going on?" If you need a loan and keep getting denied,  it can be a frustrating and perplexing situation. The financial landscape is complex, and various factors can contribute to loan denials. It's essential to recognize that facing rejection doesn't reflect your worth or financial competence; instead, it provides an opportunity for reflection and improvement. 

12 Reasons Why Your Personal Loan Was Denied

Here a 12 reasons why your loan application was not approved by the lender. Each one represents an opportunity for self-improvement, or, at the least, financial improvement. Furthermore, all of these reasons are fixable with some time and planning. 

1. Credit Score Isn’t High Enough

When applying for a loan, for example, a personal 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. 

What Can You Do If Your Loan Was Not Approved Due to 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. 

2. Recent Credit History or Bankruptcy

Recent financial setbacks, such as bankruptcy or a sequence of late payments, can significantly impact your credit history. Lenders meticulously scrutinize this information, and recent negative entries can raise red flags, leading to a denial. It underscores the importance of maintaining a positive credit history.

3. Debt-to-Income Ratio Is Too High

Your Debt-to-Income (DTI) ratio is a crucial metric that lenders assess to gauge your financial health. A high DTI suggests a substantial portion of your income is already committed to existing debts, making it challenging to take on additional financial obligations. Lowering your DTI can enhance your loan eligibility.

4. Employment History Isn’t Consistent

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 to compare income over a longer period. 

5. Qualifying Income Isn’t Enough

Lenders evaluate whether your income meets their requirements for the requested loan amount. If the qualifying income falls short, it signals to the lender that you may face challenges in meeting the financial obligations of the loan. Ensuring your income aligns with the loan request is crucial.

6. Debts Weren't Disclosed

Full transparency is vital when applying for a loan. Concealing existing debts during the application process can lead to a denial. Lenders rely on accurate financial information to make informed decisions about your creditworthiness. Honesty is the best policy when it comes to disclosing debts.

7. Risk for the Lender Is Too High

Lenders assess the risk associated with lending to you. If your financial profile raises concerns about the likelihood of repayment, they may opt to deny the loan to mitigate potential losses. Mitigating perceived risk can involve addressing other aspects of your financial health.

8. Your Application Has Errors

Even minor errors in your application, such as inaccuracies in personal information or financial details, can result in rejection. Thoroughly reviewing and double-checking your application before submission is essential. Accuracy in your application is critical for a favorable outcome.

9. Bad Timing with Life Events

Major life events, such as a recent divorce, job loss, or medical issues, can impact your financial stability. Lenders may view these events as potential challenges to loan repayment, leading to a denial. Communicating any extenuating circumstances and providing context may help in such situations.

10. Subjective Rejection from the Lender

In some cases, lenders may use subjective criteria in their decision-making process. If they feel uneasy about your financial situation, even if it meets the formal requirements, it could result in rejection. Understanding and addressing the subjective aspects of lending can be challenging but is crucial for success.

11. Amount You Requested Is Too High

Requesting an amount significantly higher than your financial profile can support may lead to denial. Lenders want to ensure that the loan amount aligns with your ability to repay. Carefully evaluating your financial needs and aligning them with the loan request is crucial.

12. The Application Was Incorrect or Incomplete

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, bank statements, your ID, your credit report, and sometimes even documentation about collateral you may have to put up 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 the Missing Paperwork on my Loan Application?

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. 

What To Do After Being Denied a Loan

After you receive your loan denial, it may be easy to block out what happened, but it is always best to fully understand your application's denial and maybe even call the lender if you are confused.

The first thing you will want to do after being denied is to review the decline notice. This will 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.

How to Improve Your Chances of Getting Approved for a Loan

1. Build Your Credit Score First

Prioritize improving your credit score before applying for a loan. Timely payments, reducing outstanding balances, and addressing any errors on your credit report can positively impact your score. Consider obtaining a copy of your credit report and addressing any discrepancies.

2. Improve Your DTI Ahead of Time

Lowering your debt-to-income ratio demonstrates fiscal responsibility. Pay down existing debts and avoid taking on new ones to improve your DTI. Creating a comprehensive budget can help manage your finances effectively and allocate funds strategically.

3. Choose a Realistic Loan Amount

Requesting a loan amount that aligns with your financial capacity is crucial. Evaluate your income, expenses, and the purpose of the loan. Lenders appreciate borrowers who demonstrate a realistic understanding of their financial needs. Opting for a loan amount that you can comfortably repay improves your chances of approval.

4. Find a Cosigner

A cosigner with a strong credit history can significantly bolster your application. Their willingness to share responsibility for the loan provides the lender with an additional layer of assurance, increasing the likelihood of approval. However, it's essential to choose a cosigner wisely and ensure they understand the responsibilities involved.

5. Secure Your Loan with Collateral

Offering collateral, such as property or valuable assets, provides lenders with added security. This security can make them more inclined to approve your loan, as it reduces their risk in the event of default. However, it's crucial to be aware of the risks associated with secured loans and ensure you can meet the terms.

6. Prequalify Before Applying

Prequalification is a valuable step in the loan application process. It allows you to assess your eligibility without a hard credit inquiry. Prequalification provides insights into potential issues and allows you to address them before submitting a formal application. Many lenders offer prequalification services online, making it a convenient and informative step in your loan application journey. For example, Simple Fast Loans has an easy application that getting online loans quick, and, best of all, you can get it done without leaving your house.

While a loan denial can be a challenging experience, it should be viewed as an opportunity for growth and improvement. Understanding the reasons behind the denial empowers you to take corrective actions. By strategically addressing financial challenges and proactively enhancing your creditworthiness, you can significantly increase your chances of securing the loan that aligns with your goals. Remember, persistence, financial prudence, and a proactive approach are key elements in achieving your desired outcome. The path to loan approval is often a journey of continuous improvement and financial empowerment.