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Most Common Reasons to Be Denied a Personal Loan – and How to Get Into the “Approved” Circle
Banks and lenders have hunkered down during the global pandemic and government lockdowns, as creditors have tightened their lending approvals.
Data from Bankrate reveals that 21% of Americans were denied a personal loan in 2020. That percentage grows to 32% for millennials, who’ve been particularly hard hit during a souring economy.
That’s a general outlook on loan approvals – the specifics matter even more. For Americans seeking a personal loan, and getting rejected, the question is a straightforward one – why is my personal loan being rejected?
“It really depends on situation,” said Grant Ferguson, chief executive officer at UnsecuredFundingSource.com. “The most common one is the credit score not being high enough, or derogatory items are on the credit report. Other reasons could be high revolving credit balances, or a high debt-to-income ratio.”
“Lenders’ risk appetite and credit guidelines are fluid, and we tend to see rapid policy adjustments in non-collateralized loans in particular,” he added.
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Unforced errors may also come into play when a consumer gets denied on a personal loan.
“Those reasons include asking for more money than the lender might provide you, a lack of a strong employment history, and insufficient collateral assets,” said Bryce Walker, CEO at CPA Exam Guy, a certified public accountant testing aid service. “The most common reason, however, is debt-to-income ratio. This tends to be the primary prerequisite for lenders, especially when you are borrowing large sums, because it is a reliable indicator of how well you will be able to service your debt, and therefore how likely you are to default.”
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Getting Back Into the Game
If you’re denied a personal loan, don’t get mad – get moving.
“Just keep trying,” Ferguson said. “Not every borrower fits every lender, but that doesn’t mean you’re not a worthy borrower.”
To become that worthy borrowers, take these strategies into the arena with you.
Boost your odds by boosting your credit score. Curbing household debt is a great way to increase your credit score, which is a huge help in landing a personal loan.
“If you’re applying for a personal loan, one of the most impactful things you can do from a debt-to-income perspective to increase your odds of being approved is pay down as much existing debt as you can before applying,” said Bryce Walker, CEO at CPA Exam Guy, a certified public accountant testing aid service. “Your income remains the same, but the debt you are now servicing has dropped.”
Get creative. Showcase other facets of your financial life that show you’re a good personal loan candidate.
“If you’ve paid off loans in the past, show banks those records,” said Alex Capozzolo, founder of Brotherly Love Real Estate, in Atlanta, Ga. “For example, download previous statements of your cell phone bill, internet bill, and utility bills. Then send those to the bank or other personal loan lender.”
Think like a personal loan lender. The credit and lending space can be a minefield and the landscape can be confusing. Consequently, getting professional financial advice can help.
“Hire a professional advisory service to help navigate the increasingly complex waters of personal lending,” Ferguson said. “If you choose to go it alone, try and think like an underwriter would. Put yourself in their shoes and think of areas of concern, then try and address those before applying, like paying down your credit cards ahead of time, or cleaning up your credit report.”
Take the private route. Many banks will not approve you for a loan if you have poor or no credit as they will see you as a liability. But you may have other lending options.
“If you get rejected from a bank, there are plenty of private lenders that will help you get a personal loan,” said Randy Charach, editor in chief at Income.ca, a personal financial platform based in Vancouver, Canada. “The benefit of using private lenders over banks is that you can shop around for loans to find the best rate. Banks will only be able to offer you their product at one rate while private lenders are more flexible.”
Rising to the Challenge
Being denied a loan can be a major blow to your psyche, but you can rise up by making a plan and sticking to it.
“The way forward is taking the new information and insight you can gleaned about the process, regrouping and formulating a new strategy, including speaking to a financial advisor,” Welker said.
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Brian O'Connell has been a finance writer at TheStreet, TheBalance, LendingTree, CBS, CNBC, WSJ, US News and others, where he shares his expertise in personal finance, credit and debt. A published author and former trader, his byline has appeared in dozens of top-tier national publications.