There are a number of reasons why a personal loan application may be denied, so approval isn’t always guaranteed. Fortunately, the lender has 30 days to provide you with an adverse action notice outlining the precise grounds for the decision if your application is denied. Before reapplying, you can take the appropriate actions by being aware of these aspects.
Here are some common reasons a personal loan might be declined:
Low credit score
Your credit score gives lenders a snapshot of how well you’ve handled debt in the past. It’s calculated using your payment history, credit utilization, and how long you’ve had credit accounts. With personal loans typically being unsecured, your credit score plays a critical role. If your score falls below a lender’s minimum, your chances of approval drop. Even if you qualify, a lower score may result in a higher interest rate. It’s a smart move to check a lender’s credit score requirements ahead of time and aim to apply only when your score comfortably exceeds that threshold.
High debt-to-income ratio
Lenders want to be sure you can manage another monthly payment, and your debt-to-income (DTI) ratio helps them assess this. DTI compares your monthly debt obligations to your gross income. For example, if you pay $3,000 toward debts and earn $5,000 monthly, your DTI is 60%. Most lenders prefer a DTI of 43% or lower, with 35% or less considered ideal. A high DTI suggests you might struggle to handle additional debt, making approval less likely.
Insufficient or inconsistent income
Beyond credit and DTI, lenders also look closely at your income. A low or unstable income can raise concerns about your ability to make loan payments on time. Some lenders clearly list minimum income requirements in their eligibility guidelines. If your earnings fall below that threshold or vary month to month, you may want to seek out lenders who are more flexible or transparent about income qualifications.
Requesting a loan amount that’s too high
Lenders assess how much you can realistically afford to borrow based on your income and existing debt. Asking for more than you can manage might cause your application to be rejected outright. To avoid this, request a loan amount that aligns with your current financial situation. Opting for a realistic figure improves your chances of getting approved.
Not meeting basic eligibility criteria
Most lenders also set basic qualifications that go beyond your finances. Common requirements include:
1. Being at least 18 years old (or the age of majority in your state)
2. U.S. citizenship or qualifying residency
3. A permanent address and active bank account
4. A valid email address : If you don’t meet these minimum requirements, your application may not even be considered.
Errors or missing information on your application
Incomplete or incorrect applications are a common reason for personal loan denials. Missing documents or errors in your form can prevent lenders from evaluating your eligibility properly. Make sure to double-check your application for accuracy and submit all required documents, such as pay stubs, bank statements, or tax returns. It can also help to confirm with the lender that they’ve received everything they need.
Your intended loan use doesn’t fit the lender’s rules
Some lenders restrict how you can use personal loan funds. For instance, many don’t allow loans to be used for education expenses or business funding. Always review the lender’s terms to ensure your loan purpose aligns with their allowed uses. If not, your application could be declined regardless of your financial profile.
