4 Reasons Why Your Personal Loan Was Declined
Do you need cash to pay down your high-interest credit card debt? Maybe you need a lump sum of money to pay for an unexpected car repair or a new furnace for your home. A personal loan can help.
The key, though, is making sure your finances are strong enough so that you can qualify for such a loan.
The best way to pay for unexpected financial emergencies is to dip into an emergency fund that you’ve built up over the years. But what if you don’t have this kind of fund? A personal loan could be a better option than putting more debt onto your credit cards.
Personal loans can come with lower interest rates than credit cards. A quick look at personal loan options on MagnifyMoney, a LendingTree subsidiary, shows that it’s possible for consumers with solid credit to qualify for personal loans with APRs as low as 3.49%; meanwhile, according to MagnifyMoney, the average interest rate on credit cards is 15%.
A personal loan also comes with regular monthly payments, and because the interest rate on a personal loan is fixed, your monthly payment will remain the same each month. This may well be easier on your budget.
Finally, most personal loans are unsecured, meaning that you don’t have to put down any collateral when taking them out. If you took out a home equity loan, your home would act as collateral. If you stopped making payments, your lender could foreclose on your loan and take ownership of your home. With an unsecured personal loan, you won’t lose any of your assets, even if you stop making payments.
Declined for a personal loan? Here’s why
There is a potential challenge with personal loans: Not everyone qualifies for them. Lenders will look at your credit score, debt and income to determine how likely you are to repay your loan. If your debt is too high, your income’s too low and your credit score’s too weak, lenders might not approve your request for a personal loan.
If you’ve been denied for a loan with a lender, you may need to consider other options. This LendingTree tool can help you explore personal loan lenders.
But if you’d rather figure out why you were denied for a personal loan, consider these four common reasons:
1. You have bad credit
Your three-digit credit score is a key number when you’re applying for a personal loan. Lenders look at this score to determine how likely you are to repay your loan on time. A low credit score gives lenders pause: It shows that you’ve had trouble managing your credit and paying your bills.
The standard FICO credit score ranges from 300 to 850. A score above 800 is considered an excellent one, while scores under 620 are considered weaker. When applying for a personal loan, you’ll want your score to be a high one. Even if you qualify for a personal loan with a lower credit score, you’ll pay more interest. Lenders charge higher interest rates to borrowers with lower FICO scores because it’s riskier to lend to them.
Several factors determine your score, but the most important one is your history of payments. If you don’t pay your bills on time, your score will fall. Your score also will fall if your credit card balances are too high. The age of your credit matters, too.
What credit score do you need to qualify for a personal loan? That depends. This sample by MagnifyMoney shows that there are lenders who offer personal loans for borrowers with lower credit scores.
MagnifyMoney found, for instance, that borrowers need a credit score of at least 0 to qualify for a loan from LendingClub and a score of at least 600 to nab a personal loan from Upstart. You’ll need a minimum score of 640 for a personal loan from lender Prosper.
Want to review your credit score? You can see it for free using My LendingTree.
2. Your credit file is thin
Sometimes it’s not bad credit that will prevent you from qualifying for a personal loan — it could be that you have no or limited credit. In other words, you have what is known as a thin credit file.
According to Experian, about 62 million U.S. adults have a thin credit file, meaning that they have limited or no credit accounts listed on their credit reports. Experian says that a credit file is considered thin when it has just one to four credit accounts — anything from a credit card account to a mortgage or auto loan — on it.
In addition, the Consumer Financial Protection Bureau says that about 26 million U.S. adults have no credit accounts listed on their credit reports. These Americans are considered “invisibles,” and it’s not easy for them to qualify for loans or new credit.
Lenders are reluctant to take a chance on consumers who haven’t yet proven that they can handle credit. Those with thin credit files, then, don’t have the history to inspire confidence in the banks and other lenders offering personal loans.
3. You are carrying too much debt
When lenders review your request for a personal loan, they’re really looking at how likely it is that you’ll be able to pay back what you’re borrowing. That’s why lenders will also look at your monthly debt obligations.
Lenders don’t want you to have too much debt. If you do, the thinking goes, you’ll struggle to pay your monthly bills on time. Adding a personal loan payment on top of your existing debt will only increase your financial burden, so if you owe thousands in credit card debt, some lenders might reject your loan request.
Your debt-to-income ratio can tell you if you have too much debt. This ratio, as its name suggests, measures how much of your gross monthly income — your income before taxes — is consumed by your monthly debt obligations.
What’s a good debt-to-income ratio? Lenders have varying standards, but Wells Fargo says that if your monthly debts are equal to 35% or less of your gross monthly income, your debt is at a manageable level.
4. Your income is too low
A high amount of debt is only one reason why your debt-to-income ratio might be too high for lenders. If you don’t make enough money each month, this, too, can result in a debt-to-income ratio that is too high for lenders.
Wells Fargo says that if your debt takes up 36% to 49% of your income, you should take steps to either reduce your debt obligations or boost your income. And if your debt takes up 50% or more of your gross monthly income? Wells Fargo warns that you might not have enough funds to save for emergencies. And lenders? They might not want to take the chance on approving you for a personal loan.
What to do after your personal loan application has been denied
If you have been denied for a personal loan, don’t give up. You can take steps to turn that denial into an approval.
1. Find out what happened
First, find out why your application was rejected. The Equal Credit Opportunity Act states that lenders must tell you why your loan was rejected or give you directions on how to find out the reason for your denial. If your lender goes this second route, you have 60 days to request a reason for your denial.
2. Reach out to your lender, if necessary
If your lender doesn’t tell you why you were denied, be sure to contact the financial institution and ask for the reason. You can’t make positive changes if you don’t know why you weren’t approved.
3. Boost your credit score
If your loan was denied because of your credit, you can take steps to improve your credit score. First, make a new habit of paying your bills on time. On-time payments for auto loans, student loans, credit card bills, and mortgages are reported to the three major credit bureaus, Experian, Equifax and TransUnion. As you build a history of paying your bills on time, your credit score will improve.
4. Turn your credit card into a score-booster
Your credit card can be a help here. Every time you make an on-time credit card payment, this transaction will be reported to the three credit bureaus, helping your credit score. Just make sure to only charge what you can afford to pay off in full each month. You want to help your credit score, but running up debt that you can’t pay off each month is not a smart move, thanks to the high interest rates that come with credit cards.
5. Pay down your debt
If you do carry a balance on your credit cards each month, pay down as much of this debt as you can. Reducing the percentage of your available credit that you are using will also help your credit score climb.
6. Consider a secured credit card
What if you’re rejected because you have a thin credit file? You can add credit by applying for a secured credit card. Unlike a traditional credit card, you’ll have to provide collateral for a secured card. Usually, this means giving the bank or financial institution that issues you the card a cash deposit; that deposit becomes your credit limit. If you give your bank $500, for example, your secured credit card will have a credit limit of $500.
It’s easier to qualify for a secured credit card, as banks can simply take your cash deposit if you fail to make your payments. Because the bank is taking on less risk, it is more willing to approve applicants with limited credit histories.
Every time you use your card and make your monthly payment on time, your bank will report to the credit bureaus. This will help you build a positive credit history.
7. Become an authorized user
You can also build credit by becoming an authorized user on the credit card account of someone else, usually a family member. The primary cardholder on the account — again, usually a parent or another family member — has the responsibility to make payments. But every time this user makes payments, the on-time payment is reported to the credit reports of both the primary account holder and the authorized user.
Of course, you will have to convince someone to name you an authorized user, which might prove challenging. After all, as an authorized user, you are able to make purchases with the card. If you run up debt, you could damage the financial health of the card’s primary account holder.
8. Boost your finances
If your lender rejected you because you have too much debt or not enough income, you’ll have to either boost your monthly income or pay down your debt before applying again for a mortgage.
9. Shop around
Remember, too, not to let one denial prevent you from applying for another personal loan. Lenders have different minimum requirements when it comes to credit scores or debt-to-income ratios, so shop around a bit. Even if one lender denies your application, another might be happy to loan you money.