Check out these tips to find out how to handle a loan denial
If you’ve recently faced a loan denial, you may have felt a bit disheartened, but understanding why your loan was turned down can really help you plan your next steps and increase your chances of getting approved in the future.
Why Was Your Loan Denied? Let’s Figure It Out
The first thing to do is to get to the bottom of why your personal loan application was denied. Each lender has their own set of criteria, so it’s helpful to know what might have influenced their decision.
The silver lining is that when a loan application gets rejected, the lender is required to give you a notice explaining the reasons behind it.
Here are some common culprits that could lead to your application being denied:
Income Issues
One major reason for denial often comes down to income. There are usually two key factors at play here.
First, it’s possible that your income just doesn’t meet the lender’s minimum requirements.
Since most lenders don’t share these thresholds publicly, it can be tricky to figure out if you qualify unless you ask or do a bit of research.
High Debt-to-income ratio
To find out your DTI, simply divide your total monthly debt payments by your gross monthly income. Generally, lenders prefer a DTI of 50% or less, while mortgage lenders may look for even lower figures, like 43%.
If your DTI is on the higher side, lenders might worry that you wouldn’t be able to manage another loan payment.
If you want to increase your chances next time, think about paying off some of your current debts or exploring ways to boost your income.
Credit
Your credit history and scores are two of the biggest factors lenders look at.
Negative items can hang around on your credit report for about seven years, but the good news is that their impact usually fades over time.
If lenders see any major red flags on your credit report, they might decide that you’re too much of a risk to approve for a loan at this point.
What to Do Before Reapplying
Let’s talk about a few things you should consider to up your chances of getting approved next time.
Take it easy on the applications: Submitting too many applications in a short time can hurt your credit score, which could make it even tougher to get approved later on.
Tackle your debts: Try to pay down some of your existing debts. Working on your debt-to-income ratio (DTI) can really help you look more appealing to lenders.
Check your credit report: Take a look at your credit report. Sometimes, there are mistakes that can be fixed! If you spot any errors, dispute them and get those corrected before you reapply.
Consider a co-signer: Some lenders might let you reapply sooner if you can find someone with good credit to co-sign your loan.
How to Improve Your Chances of Getting a Personal Loan
Think about collateral: If you’re having a tough time getting approved, look for a lender that lets you use something valuable—like a savings account or a car—as collateral.
Stay put for a bit: It might be smart to wait until you’ve been at your current address for at least a year before applying.
Boost that credit score: Pay your bills on time and in full, and try to lower your credit card balances to enhance your credit utilization.
Get pre-qualified: Usually, pre-qualifying won’t hurt your credit score. So, before you fill out that official application, see if you can get pre-qualified. If you can’t, it might be worth waiting a bit until your financial situation improves.
Remember that even if you can’t control all of these factors right now, it’s essential to take them into account.
Focus on making improvements in your financial situation, and be patient while you wait for a better time to apply again.
Enjoyed the read? Be sure to check out our article on how a personal loan can help you consolidate your debts!