Rejection is never easy. Whether your boss passes you over for a promotion or your crush fails to swipe right, it can leave you feeling blue.
But these blows to your self-worth pale in comparison to what you may feel after a lender rejects your application for a personal loan. This rejection may be a hit to your financial situation alongside your self-esteem.
Unfortunately, rejection is a reality of the financial world. A 2018 report shows roughly 76 percent of people are denied a personal loan.
The fact is, you aren’t guaranteed a loan, even if you truly need it for an unexpected expense. Check over these common reasons why online loan applications may be denied.
1. Your Credit Score is Too Low
Although applications will differ from one lender to the next, many applications evaluate a borrower’s ability to pay back a loan.
One of the ways to evaluate you as a borrower is by checking your credit score. As a numerical representation of your past borrowing performance, it shows a lender how you’ve managed debt and paid your bills in the past.
What credit score for personal loan approval do you need?
Most mainstream banks and lending institutions require a fair credit score as a credit score. If you have a lower score, you may end up receiving less money than you ask for or even being denied for a loan.
But that doesn’t mean someone with bad credit is out of luck.
If your credit score is preventing you from getting a loan through a traditional financial institution, you may have a better chance using an online lender or service provider, such as MoneyKey. Some online lenders may take your credit score into consideration but also use other metrics to determine if you’re a reliable borrower.
To see how else they differ from traditional lenders, click here for more information about online lenders and their processes.
But before you apply, it’s important to know how personal loans work. Typically, these loans are more expensive than traditional options. Although they may have a higher Annual Percentage Rate (APR) – which is the cost of credit expressed as an annual rate – these loans may be a good backup option for someone with bad credit. Online lenders may offer you a chance at receiving a loan if you’re denied elsewhere.
When it comes to first time personal loans, having no credit history may make getting a loan just as hard as having bad credit. No credit, also referred to as thin or "unscorable" credit, is an absence of credit history. Paying back a loan on time may give you the opportunity to improve your credit score, as long as you’re able to keep up with other healthy credit-related habits.
2. Your Employment Situation is Too Volatile
An online lender may want to see that you earn enough money on a regular basis to accommodate your loan payments. Unstable employment history may raise a red flag to lenders, as it indicates you may not have enough cash on hand to meet your repayment terms.
Some lenders are strict about their employment requirements. They expect borrowers to have a full-time job with a minimum take-home pay. If you don’t meet these standards, you may have your application denied, even if you have good credit.
Other lenders are more lenient
Here at MoneyKey, we don’t require our borrowers to have full-time employment. What we require is proof you have a regular source of income that provides you with enough money to cover your repayments. That means you can still apply for installment loans or lines of credit even if you’re:
- Self-employed or a freelance worker
- Earning income from dividends or property
These requirements may still be a challenge to meet if you don’t have a consistent income source. If you’re not earning income consistently, some lenders may let you co-sign with another person to boost your application. If your co-signer has good credit and a stable source of income, together you may seem like less of a risk to a lender. By putting their name on the contract, a co-signer accepts the responsibility of repaying your loan in the event you are unable to pay.
Finding someone who’s willing to co-sign a loan may be challenging. It’s important to be prepared by making sure you approach this person knowing all the details of the loan. Be honest with them about how you intend to pay back the loan and avoid a situation where they end up making payments on your behalf.
Also, make sure this person is someone you trust. Co-signers may have rights and options under certain personal loan agreements.
3. You Applied for the Wrong Loan for Your Needs
Let’s be honest — few people actually enjoy paperwork. And that may go for both borrowers and lenders.
It doesn’t matter what side of the loan you’re on, it’s one of the necessities of a financial transaction. All the ‘t’s must be crossed and ‘i’s dotted before a borrower and lender can strike an agreement.
If you’re one of those people who loathes filling out forms, then you may find applying for a loan daunting. Although there are many reasons why people get personal loans, their reasons may often be urgent or important.
To improve your chances of approval — and reduce how many applications you fill out — you should make sure the loan you want meets your needs.
Think of it this way, you would not be able to secure a mortgage if you weren’t planning on buying property. Nor would you be able to get an auto loan if you wanted help to finance a home renovation.
Many loan products have intended uses. Whether you need help with real estate or renovations, it’s important you choose the right product for your goals. For example, installment loans are best used when you need help covering an unexpected bill or urgent repair you can’t ignore.
If you find yourself in an emergency without enough money to cover costs, look into a short-term installment loan to see if it meets your needs.
4. A Lender May Want to Limit its Credit Exposure
Let’s say the previous three scenarios don’t apply to you. You have a good credit score, a steady income, and have found a suitable loan for your needs.
So how could you still get denied for a loan?
It may have something to do with how much you’re asking for in your application. Like a bad credit score, requesting a large loan amount may make you a riskier applicant.
Many lenders have policies in place that limit how much money they’re willing to lend each borrower. This total amount the lender is willing to lend is sometimes referred to as the credit exposure. The level of credit exposure indicates the level of risk of loss a lender is willing to accept.
If you ask for a loan that surpasses the lender’s policy, they may deny you financing, even if you have excellent credit.
5. Your Total Debt Service Ratio is Too High
Your Total Debt Service Ratio (TDSR) is a quick calculation used mostly by mortgage lenders, but any lender may use it before they approve an application.
It shows how much of your income goes towards monthly housing expenses, from credit cards and personal loans to property taxes and mortgage payments.
What’s important to a lender is how much money is left over once you pay these expenses. If there’s very little expendable cash left, it suggests the loan may be a burden to repay.
Ideally, you’ll want your TDSR to rest around or less. If you exceed this number, a lender may deny your request.
To find out your debt service ratio, follow this simple equation:
Monthly debt obligations ÷ Gross monthly income = TDSR
So, for example, if your mortgage, personal loans, and credit cards total $2,500 a month, and you make $4,100 a month, it would look like:
$2,500 ÷ $4,100 = 0.61
Multiply your result by 100 to create a percentage, and you’ll see this shows a 61 percent TDSR. Since this is well above the recommended standard, this may be the reason why you have your loan denied.
As this ratio climbs, so does your potential risk as a borrower. A high TDSR could mean you’re overburdened by existing debt, so a financial company may limit their credit exposure by limiting a financing amount or denying an application outright.
Meanwhile, people with low debt-to-income ratios may face fewer restrictions.
6. The Product You’re Applying for May Not be Available in Your State of Residence
Whether you live on the sunny California coast or in the Great Plains of Kansas, location matters. Although where you call home can influence the type of weather you experience and what football team you’re expected to root for, it also impacts your loan options.
Each state has its own lending laws that affect how personal loans work. Your location can influence the:
- Loan products available
- Size of your loan
- Interest rates
- Repayment terms
Let’s look at a couple of examples of how this works in the real world.
- At MoneyKey, you may be able to apply for either an online payday loan or an installment loan if you live in California. However, if Kansas is your home base, MoneyKey only offers a personal line of credit.
- Although the U.S. Federal Reserve sets a national mortgage rate, interest may fluctuate from state to state. They may even vary from rural to urban property, as the USDA’s Rural Development offers affordable financing for low-income buyers in the country.
It’s natural to want to find the best deal possible. In researching your options for personal loans you might come across a product or rate that suits your budget. Just make sure it’s available in your location and you understand the terms of the loan product before signing the agreement.
7. You Shared Incorrect Details
Sending an incomprehensible text to a friend because of a few slips of your finger is one thing, but a typing error on a loan application can cost you.
Online lenders review your application to verify your information. If they find any inconsistencies, such as an incorrectly typed Social Security Number, your application may be rejected outright. Ensuring the information in your application is free from errors may help avoid a situation like this.
Although has streamlined the application process to make it as uncomplicated as possible, make sure to review the information carefully before you hit the “submit” button.
We’ve put together some additional tips that may help prevent minor errors in your loan application:
- Read everything back out loud: When you read something out loud, you’re more likely to catch errors. It forces you to look at the information on a page differently, and this new perspective can reveal you’ve made a mistake.
- Get someone you trust to read it over: A second pair of eyes is another way you can avoid sending off an application filled with errors. Make sure you choose someone you trust with your finances, as they’ll be reading over intimate financial details.
- Know your dates: Here in the States, dates usually read month-day-year, but there may be variations in how lenders want them presented. For example, if your birthday is August 24, 1984, find out if you should write it out as 08/24/1984 or 08/24/84.
- Confirm number formatting: The same basic rule from above applies to any number you share in an application, whether it’s your bank account or phone number. If the application form doesn’t automatically format your input, make sure you copy their examples exactly. Pay close attention to spaces. Do you need to type your account or phone number without breaks or do the examples show hyphens and parentheses?
Reading things out loud and following proper format are good rules of thumb whenever you fill out a form, even if it has nothing to do with your finances. Whether it’s for a new passport or a rental application, review every application with these tips in mind.
As for your loan application, make sure you’re aware of the usual issues people face when applying for a loan. From asking for too much to applying with subprime credit, there could be a variety of reasons why your application was denied.
A couple of the reasons your application may have been denied have relatively simple fixes. For example, catching errors and applying for loans available in your state can be an easy fix.
Other reasons, like rebuilding credit, may require time and effort to improve. If you don’t have the time to tackle the issue that’s preventing you from getting a loan, try researching loan alternatives that have requirements you can meet. Don’t let one rejected loan application stop you from getting the loan you need.
