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Amid rising inflation and a looming recession, many Americans are feeling the financial crunch. A survey by found that out of the 70 percent of U.S. adults that hold some sort of debt, 13 percent reporting have a personal loan.
Personal loans can be a lifesaver in case of an emergency, but qualifying for one can be tricky in a tough economy. That’s because lenders tend to tighten their credit requirements to mitigate risks.
If you recently applied for a personal loan and got denied, there are several steps you can take to improve your creditworthiness and your chances of approval.
- The national personal loan debt balance reached $222 billion in the last quarter of 2022 — a 32% increase from last year.
- 22.5 million adults have personal loan debt in the U.S.
- The average debt per personal loan borrower is $11,116.
- The average amount of new unsecured personal loans is about $8,000.
- Personal loan delinquencies increased to 4.14% in 2022 — the highest level seen since 2011.
- Personal loans have an average interest rate of 10.71%.
- Borrowers with credit scores between 720 and 850 secure the best personal loan rates, with an average interest rate between 10.73% and 12.5%.
- Borrowers with credit scores of 620 and under pay the most on interest, with an average personal loan rate between 28.5% and 32%.
- 25% of Americans take out personal loans to pay for home improvements, compared to 21% to pay for medical bills.
- Other popular uses for personal loans include vehicle financing, auto repairs and debt consolidation, each accounting for 20% of all loans originated during the pandemic.
Personal loan requirements
To get a personal loan, you need to meet certain requirements. When lenders decide if they want to lend to you and what terms they’re willing to offer, they need to establish your creditworthiness and likelihood of being able to repay the loan.
Some of the major factors lenders consider when reviewing personal loan applications include:
- Collateral. While secured personal loans are less common, they tend to be a bit easier to get. Collateral for a personal loan can be any valuable asset. That item is typically used as collateral if you take the loan out specifically to pay for your home or car. Secured loans can be risky because you risk losing your asset if you default on the loan.
- Credit score and history. Your credit score is the most important indicator of loan eligibility. Credit scores range from 300 to 850. The higher your score is, the more likely you are to qualify for loan products. Your credit score depends on your borrowing history and how reliable you are about paying back your debts.
- Debt-to-income ratio. Your debt-to-income ratio, or DTI, is the percentage of your monthly income that currently goes toward paying off debt. Lenders use your DTI to predict the likelihood of you being able to pay back your loan. A DTI of 36 percent or less is considered good, but some lenders allow DTIs up to 50 percent.
- Income. Many lenders require borrowers to have a minimum annual income. Most lenders require at least some proof of income when you apply, even if they don’t have a minimum set.
Reasons personal loans are rejected
There are several reasons someone may have their loan application rejected:
- Bad credit history: Bad credit history may indicate to creditors that you might be having trouble repaying what you owe based on past transactions. Although your credit score is generally a good indicator of credit history, lenders also look at your overall financial history to establish your creditworthiness.
- High DTI: If you have a DTI of 50 percent or higher, you might have too much debt for a lender to give you a new loan. If that’s the case, it’s best to apply after reducing your overall debt, as this will increase your chances of approval.
- Incomplete application: Your loan rejection could be as simple as missing documentation. If you are rejected for a loan, double-check that you fully completed the application and submitted all the proper documentation.
- Lack of proof of steady income: Consistency is key because it helps lenders understand your job landscape moving forward. Because jobs can vary depending on the line of work, lenders may look at tax returns to get a better overview.
- Loan doesn’t fit the purpose: Lenders might have certain restrictions on what you can and can’t do with loan money. The lender may be able to offer you alternative suggestions to better fit your needs.
- Unsteady employment history: Lenders like to see a steady income stream over time. If you are between jobs or have a history of unsteady employment, this could indicate to lenders that you may not be a reliable borrower.
What to do if you are denied
If you apply for a personal loan and are denied, there are several things you can do to improve your chances of qualifying next time.
First, you should ask the lender why your application was denied. Under the Equal Credit Opportunity Act, lenders must disclose the reason for denying your loan application as long as you inquire about it within 60 days of the decision. This is known as adverse action notice, which is the key to taking action and increasing your chances of qualifying for your next loan.
The top reasons personal loan applications get denied are bad credit, a lack of credit history, unstable income and high debt to income ratios.
Review and build your credit score
The most important thing you can do to increase your chances of qualifying for a personal loan is keeping a healthy credit score. The average FICO score in the U.S. is currently 716, however, to qualify for a personal loan you’ll typically need a score upwards of 600.
If you aren’t sure whether your credit score is in mint condition, the best thing you can do is review a copy of your credit report. You can request a free copy of your report from all three bureaus every 12 months by visiting AnnualCreditReport.com. Although this won’t show you your actual score, it will give you an idea of where you stand with creditors, as well as if there are mistakes that need to be corrected.
Once you know your credit score and have reviewed your credit report, there are several things you can do to build up your credit. Make all debt payments on time, and keep credit card balances low to avoid piling on extra debt. You can also become an authorized user on someone else’s account. This can be helpful if that person has a better payment history and a low utilization rate.
Pay down other debts
Lenders typically look for a DTI under 36 percent, although some allow applicants with DTIs as high as 50 percent. If a high debt-to-income ratio impacts your ability to take out a loan, work on paying down your current debts before applying for more credit.
One way to do that is to tighten your budget and cut down on monthly credit card expenses. If you have different types of debt (credit cards, loans, etc.) you can try using the snowball or the avalanchepayoff strategy.
The snowball strategy consists of paying off your smallest debt — regardless of the interest — and moving up from there. The avalanche method focuses on paying off the account with the highest interest first — regardless of the balance — and work down from there.
Look for ways to raise your income
A higher income can help lower your DTI and make you more attractive to lenders. Finding ways to supplement your income could improve your chances of qualifying for a loan. Consider asking for a raise at your current job, especially if you haven’t received one in a while. Another option is to take on a side gig. A recent Bankrate survey found that 31 percent of U.S. adults have a side hustle, out of which, 41 use it to pay for regular living expenses.
Compare personal loans
Various lenders have different requirements, rates, terms and fees. Research lenders and compare rates before applying to one in particular. The lender that will work best for you depends on your specific financial situation and needs. Prequalifying with a few lenders is a good idea to see exactly what you will be eligible for before applying. You can get a personal loan from online lenders, banks and credit unions. Each option caters to people with different incomes, credit scores and personal life schedules.
Prepare with personal loan preapproval
Try prequalifying with a few lenders. Although prequalifying is not guaranteed approval, getting a prequalified offer means that you met the initial requirements. Many lenders allow you to prequalify without impacting your credit score or making a commitment. However, your application could be denied if something changes, such as your income or credit score.
When you are ready to reapply, ensure that your documentation is up to date to reflect all the hard work and changes you made. If you are still unsure if you will qualify, try finding a cosigner. This option is not just for people who don’t meet requirements- it can also give people an extra boost in getting a lower rate. However, a cosigner is responsible for paying for any missed payments.
When to apply for a loan again after denial
Each time you apply for a loan or any other type of credit, the credit application shows up as a credit inquiry on your credit report, lowering your credit score. For this reason, it is a good idea to wait a while before applying again. You should wait at least 30 days before applying again, but experts recommend waiting six months to give yourself the best chance of qualifying.
While you are waiting to reapply, you should work on resolving the reason for your loan denial. Pay down any debts, try to improve your credit score, improve your income if possible and research lenders with more relaxed eligibility requirements. If you are making payments on other debts during this time, ensure you get the most up-to-date credit reports before submitting another loan application.
The bottom line
While being denied a loan can feel like a major blow, especially if you need cash quickly, there are many things you can do to remedy the situation and improve your chances of qualifying the next time you apply.
If you need money quickly and can handle the higher interest rates, there are loans for bad credit borrowers that tend to have more relaxed requirements. However, be aware that you need to wait at least one month before reapplying for a loan after being denied and that you should only sign up for a loan if you are sure you will be able to make the monthly payments plus interest and fees. You can also try reapplying for a smaller loan amount. The lower the loan amount, the higher your likelihood of approval.
To improve your chances of qualifying for a personal loan, you can best work down your existing debt and improve your credit score and debt-to-income ratio.