by Daniel Tannenbaum ·
Modified on 15 September, 2022
It can be disheartening if your loan is declined. It could cause something of a crisis if your loan was to be spent on an emergency bill or payment.
However, the first thing to do in this scenario is to keep calm and gain an understanding as to why your loan may have been declined on this occasion, what you can do in the future to increase your chances of being accepted, and to explore some alternatives.
Some common reasons for having a loan denied include a low credit score, a high debt-to-income (DTI) ratio or insufficient income, but rest assured, there are options for you.
Why Am I Getting Declined For Loans?
There are several reasons why you could be denied for a personal loan, and thankfully, you will not have to guess. Lenders are required to send you an adverse action notice within 30 days explaining your loan rejection. If you need additional clarification, you can also call the lender and ask what happened.
Low credit score.
Your credit score suggests to lenders how good you may be at managing money. Factors like your payment history and amount owed are usually weighed in your credit score.
If you’re looking for an unsecured personal loan — a loan that doesn’t have collateral attached to it — lenders can have stricter lending requirements and so credit could be a key factor in play.
Your debt-to-income (DTI) ratio was too high.
This ratio compares your monthly debt total with your monthly gross income.
For example, if your monthly debt payments are $3,000 and you divide that by your monthly income of $6,000, then your DTI ratio would be 50%. A high ratio could signal to lenders that you might struggle to afford debt repayment.
For that reason, it’s best to aim for a DTI ratio of 35% or less, which is generally considered good.
Insufficient or unstable income.
Lenders will most always examine your income to determine whether you’ll be able to pay back your loan. They want to make sure you can afford your monthly payments and won’t default on the money you owe.
If a lender decides that your income is insufficient for the amount you want to borrow — or if it appears unstable from month-to-month — the lender might reject your application.
How to Avoid Getting Denied for Loans
Build your credit score before you next apply.
To avoid being denied for a personal loan due to having a low credit score, the best thing you can do is build or repair your credit score before applying.
Ben Sweiry, co-founder of loans connection service, Dime Alley, commented: “lenders will usually offer you a more favourable rate if you have a good or excellent credit score, but with our service, we take all credit histories into account. Our aim is to connect our borrowers with a lender who’ll suit their specific financial requirements”.
Look for ways to increase your income and pay-down any debts.
To improve your DTI ratio, you have two options: increase your income or pay down your debt. If you do both simultaneously, you’ll improve it faster.
What Are Some Alternatives to a Loan?
Consider a low-interest credit card.
Although your credit may be a bit wobbly right now, you might be able to get a low-interest credit card (or at least a card with an APR that’s considerably lower than the APR for a payday loan).
Look into a cash advance from a credit card or your employer.
A credit card cash advance typically charges a lower interest rate than a payday loan. Keep in mind, though, that the APR for a cash advance from a credit card may be higher than the APR for purchases made on the same credit card.
Borrow from family or friends.
If you’re in a financial bind, borrowing money from family and friends may be a great way to dodge a high-interest payday loan. In fact, you may even be able to borrow money with no interest.