When applying for an unsecured personal loan, there’s no such thing as guaranteed approval. Sometimes an application will be denied, but the reasons aren’t always obvious or clear.
Before you start thinking about how soon you can apply for a loan after being denied or even trying another lender, it’s in your best interest to figure out why your application was rejected and what you might do about it.
Reasons a Personal Loan Application Can Be Denied
There are many reasons a personal loan might be denied. Some of the more common ones are:
Bad Credit – one of the first things a lender will look at is your credit score. Even if you have a fair credit score of 600 or better, you can still be denied. When a lender sees evidence of things like multiple late payments, defaulted on a loan or bankruptcy, they consider an applicant risky and without the necessary creditworthiness many look for to be approved.
Debt – if you carry too much debt and have a debt to income ratio (DTI) of greater than 30% many lenders will see this as a red flag and may disapprove your loan application. This is taken as a sign that you will have trouble making loan payments or possibly default on the loan.
Missing Information – if your application has missing info or you have entered your details incorrectly, this will often impact your ability to get approved for a loan, and often lead to your loan request to be rejected.
Insufficient income – if you don’t have an adequate income to afford the minimum monthly payments of a loan, your request is likely to not be approved. Reducing the amount you request to borrow can sometimes help and increase your odds of approval.
Other reasons for being disapproved can include your bank account or job is too new, the length of time at your current residence, and even changing your phone number frequently. With most lenders, the main reasons are often related to credit score, debt, income or missing/incorrect information provided.
RELATED: How to Get a Loan with Bad Credit
What To Do if Your Loan Application Is Denied?
The first thing you should do is to inquire why your loan request was disapproved. This can help you to determine what you might work on so you can be eligible for a loan in future.
It might be a poor credit score, too much debt or another reason. It’s important to find out so that you can work on whatever personal finance issues preventing your approval, such as improving your credit score before applying again.
A good place to start would be to get a copy of your credit report from either Equifax or TransUnion. Review to ensure that the info is correct and see if there are errors, inaccuracies or derogatory remarks that can be addressed.
Next would be to look at your debt to income ratio and determine whether this might affect whether it’s a reason your application was denied. If you carry a significant amount of debt and have multiple repayments to take care of each month, this can be another reason why your application was disapproved.
When you have a credit score below 600 your options to find a lender decrease considerably, but if the funds aren’t too urgent, you can always work on this. If it’s more of an emergency you might try looking into finding a co-signer.
Developing good financial habits and using a budget can help Canadians to improve and maintain a strong credit score so that your chances of approval are higher and you can get better interest rates/APR to reduce your cost of borrowing in future.