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3 Reasons Your Personal Loan Application Was Denied

Being turned down for a personal loan is a serious blow, especially if you were banking on getting the cash. Understanding why your application was denied in the first place can help you out the next time you try to qualify for a loan. The Equal Credit Opportunity Act requires lenders to explain why your loan was rejected, but that might not tell the whole story. If you’ve tried to get approved through multiple lenders with no luck, here’s what might have happened.

Check out our personal loan calculator.

1. There’s an Error on Your Credit Report

Credit reporting errors are more common than you think and they can easily prevent you from getting a personal loan. According to a study from the Federal Trade Commission, one in four consumers has found at least one error in their credit file.

The kinds of errors that can cause you to lose out on a personal loan include things like payments being reported incorrectly and closed accounts still showing up as open. Inaccuracies involving late payments are particularly dangerous since these can cause your credit score to drop.

If you’ve been denied a personal loan, it’s a good idea to check your credit report for errors. If you see something that doesn’t look right, the next step is to initiate a dispute with the credit bureau that’s reporting the information.

2. Your Credit File Is Thin

3 Reasons Your Personal Loan Application Was Denied

Building good credit can be somewhat of a catch-22. You need a good credit score to get approved for a loan but you need to be making payments on a loan or another form of debt to improve your score.

If you’re having trouble getting a personal loan and you don’t have a lot of experience with using credit, that could be the problem. So what can you do to fix it? Instead of trying to get a personal loan, you may want to apply for a credit card first.

Credit cards come in two flavors: secured and unsecured. Secured cards are geared toward people with bad credit or no credit and they require you to pony up a cash deposit to get approved. If you can’t get a personal loan right away, you can use a secured card to build your credit and improve the odds of getting a loan down the line.

Check out our credit card calculator.

3. You Have Too Much Debt

One thing lenders look at when they’re reviewing loan applications is your debt-to-income ratio. This is how much of your take-home pay is used to cover your debt each month. A personal loan can be a way to consolidate your existing debts and potentially lower your interest rate, but you might not qualify if you owe a lot of money already.

If you’re handing over 40% or 50% of your earnings to service your debts, that can seem like a big red flag to a personal loan lender. You’re more likely to be considered a high-risk borrower and the lender might wonder how you’ll be able to meet the new loan obligation. If you’re already knee-deep in debt, knocking down the balance before you apply for a loan could be a smart move.

Related Article: 3 Personal Loan Mistakes You Can’t Afford to Make

Double-Check the Details Before you Apply

3 Reasons Your Personal Loan Application Was Denied

Loan applications can be tricky to navigate and there are certain pieces of information lenders need to decide whether to approve you. If you forget to include something, like your work history or a source of income outside of your regular job, you could sabotage your application without even realizing it.

Reviewing your loan paperwork carefully and following up with the lender to make sure they have everything they need can prevent a simple mistake from tanking your application.

Update: Have questions about more than just a loan? So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and your goals. Then the program will narrow down your options to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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