Personal Loan Application: 5 Reasons You Can Get Denied -- and How To Avoid Them
Applying for a personal loan can be a stressful prospect, and there’s usually some degree of anxiety over whether your application will be approved in time (or at all) on behalf of the borrower.
If that describes you, it’s important to make sure that you’re actually in a position to execute a successful personal loan application – here are some of the pitfalls or obstacles that most commonly thwart attempts.
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Incomplete or Incorrect Info Means Low Odds of Success
It may sound simple, but the devil is often in the details: If you fill out an incomplete application form, or you do not append necessary or requested documentation (i.e. pay stubs or proof of income, bank statements or past tax returns), your odds of being denied increase drastically.
Likewise for errors within the application itself. A loan application is governed by the Equal Credit Opportunity Act (ECOA), and lenders are required to provide an adverse action notice to prospective borrowers whenever a denial is made. Whenever you’re dealing with paperwork as vital as a personal loan application, it’s absolutely necessary to ensure every detail you provide is accurate.
Take the time to double-check your application against the requests made by your desired lender. Also ensure to take the time to read the fine print to verify that your intended use of the loaned money matches the lender’s use restrictions.
Your Credit Score May Be Too Low
A low credit score is another common reason your personal loan application might be denied. Due to the fact that a lower credit score is associated with a higher risk profile on the part of the borrower, lenders may be more cautious in offering a loan – and if they do, interest rates attached to that loan are likely to be more severe.
It’s always a wise move to monitor your credit score, checking your credit report as issued by Equifax or TransUnion. Scour the report for any missed payments, significant credit utilization or defaults. Cutting down on your outstanding debt and ensuring you’re always making timely payments can help repair a poor credit score.
Your Income Stream May Be Insufficient or Simply Unstable
If your source of income is insufficient to feasibly repay the loan under the requested terms, or your job or gig work is considered volatile or unstable by the lender, you could see your personal loan application fail. This is because you are perceived to be at a higher risk of defaulting on the loan, and personal loans – as unsecured credit vehicles – are innately riskier for lenders.
You May Have an Unfavorable Debt-to-Income Ratio (Even If You Earn a Lot of Money)
Even high-earners could find themselves staring down a rejected personal loan application if their debt-to-income (DTI) ratio is unfavorable. Lenders typically calculate this by doing a comparison of your monthly debt obligations versus your income streams, then moving forward to see if you could reasonably pay back the money you’re looking to borrow from them.
If not, you could be fresh out of luck. Paying off high-interest debt – or taking on a second job or a freelance gig to boost the income side of this equation – could help to tip the odds back in your favor.
Basic Application Requirements Are an Oft-Overlooked Personal Loan Application Hurdle
Last, but not least: Be sure that you actually qualify for a personal loan by observing the basic application requirements. Having reached the age of majority in your state; being a U.S. citizen or, in some cases resident; being in possession of a permanent address and a bank account in good standing; and having a mailing address and e-mail address are just some of the most frequent asks made by lenders.
Making sure that you check all of the above boxes (and any other particular requirements set out by the lender you’re looking to do business with) can save a lot of wasted time.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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