There’s no such thing as guaranteed approval when it comes to personal loans. But that doesn’t mean there aren’t ways to increase your odds. We’ve curated a list of reasons why loan applications get rejected plus our best tips and tricks to improve your loan application and avoid getting a credit-damaging inquiry for nothing.
7 reasons lenders reject personal loan applications
Bad credit history. If you’ve made multiple late payments, defaulted on a loan or been in bankruptcy, a lender is unlikely to approve your loan application. Check your credit score to see what kind of problems are listed on your report.
Insufficient income. A lender won’t approve your application if you can’t afford the monthly payments that come with borrowing a loan.
Loan purpose. Lenders are more likely to approve loans for debt consolidation or home improvement than vacation. If your loan purpose doesn’t match with a lender’s expectations, you won’t be approved.
Missing information. Lenders will verify the details you put in your application. If you’ve entered something incorrectly, your lender will likely reject your request for funding.
Unstable employment. Lenders are very meticulous about the stability of your job. A number of lenders insist that you should have a stable job or at least a regular source of income.
Too much debt. If you already have a loan, credit card or extra debt, you might be rejected. This is because your debt-to-income ratio will be relatively high, indicating you may not be able to pay off your loan.
Low value of secured assets. Lots of lenders have restrictions on the type of asset you can use as collateral for a secured loan, so if your asset doesn’t meet these requirements, your loan could be rejected.
The best defense against personal loan rejection is knowing what it takes to be approved by a lender. These 7 tips should help increase your chances of getting that approval notice.
Check the credit requirement and know your score
Your credit is one of the main factors lenders consider when you apply for a loan, especially an unsecured personal loan. Each has its own minimum you must meet in order to qualify.
Not every lender requires excellent credit. But even if you have strong credit, if you don’t meet the lender’s requirement you will likely be rejected outright. If you’re unsure your credit score or history qualifies, ask the lender before you apply.
You can also check your credit score ahead of time so you’re working with the most accurate information possible when you’re comparing lenders. And it gives you a chance to look into any potential errors on your report before you apply.
Check the minimum income requirement
Many lenders also have a minimum income requirement. This may not be listed on the lender’s website, so you could have to do some digging — either by calling the lender directly or browsing their website.
Like your credit, this is one of the things many lenders consider necessary. After all, if you don’t have the income to pay back your loan, you can’t afford to borrow.
Meet the employment requirement
Lenders generally consider income of various sources, but not always. Sometimes freelance work, benefits or child support payments won’t cut it.
A lender may require you to have been employed by a company for a certain number of months or years, or that you receive your income through direct deposit.
Have sufficient collateral
Some loans — especially those from banks — require you to provide collateral in order to borrow. This can take the form of a piece of property, or it can simply be a source of liquid money that your lender can use in case you default.
You risk losing collateral if you default. But it lowers the risk the lender faces and can help you qualify or get better rates and terms. Learn more about what types of collateral can be used for loans.
Limit your outstanding debt
Your debt-to-income (DTI) ratio, like your income, is a measure of how much you can afford to borrow. It not only shows lenders that you can pay your loan each month, but also that you’re responsible with your money.
A high DTI indicates that you’re using too much of your money paying off other debts. You might want to pay off some of your debts first if your DTI is over 40%.
Ensure your loan purpose is allowed
Although personal loans are open and can be used for a number of things, not every lender allows your loan to be used for just anything. For example, you may not be able to use your loan funds for secondary education expenses or your business. Check with your lender to make sure you can apply your funds to whatever you need.
Verify your details
Before you hit submit, double-check your application. Missing even small details could result in a rejection. If a lender can’t verify your details, it won’t be able to offer you a loan.
4 steps to take after being denied
Getting denied for a personal loan can take a toll on your emotional and financial state. Rather than accepting the rejection, follow these steps to work toward a successful application next time you apply for a loan.
1. Find out why you were denied for the loan
If you contact the lender, you’ll be provided with an explanation of why you were denied for a loan. That explanation will be useful in determining what went wrong for you.
2. Order a copy of your credit report
Before you re-apply for a loan, you should order and examine your credit report for accuracy. You can receive a copy of your credit report from one of the two credit bureaus in Canada:
Equifax
TransUnion
You’ll need to provide your full name, contact information, Social Insurance Number and date of birth in order to receive your report. When examining your credit report, look for any errors.
3. Try a different lender
Requirements and eligibility criteria can vary between different lenders. You always have the option of researching other lenders for a personal loan that could meet your needs. However, you’ll want to limit how many times you re-apply for a loan before addressing the issues that underlie your loan denial.
Each time you apply for a loan, the lender will conduct what’s called a “hard pull” on your credit score, potentially affecting your credit score by about 5 points for a year. If you continuously apply and are denied for loans, you could end up lowering your overall credit score substantially since lenders will be looking into your credit score each time.
4. Take some time to address your finances
Consider waiting before attempting to apply for another personal loan. With time on your side, you can work to improve your financial situation by paying down your debts, or addressing the structural issues of your finances – which can increase your chance of approval in the future. Visit Credit Counselling Canada to get connected to free counselling services.
Bottom line
There’s no way to completely guarantee that your personal loan application will be approved. Even if you meet all the eligibility criteria listed by a lender, the lender can still reject your application at its discretion.
However, you can avoid common mistakes that lead to personal loan application rejection and follow the tips we’ve discussed to improve your chances of approval. You can also compare your personal loan options to find more lenders you may be eligible to borrow from.
Frequently asked questions
The most common reasons why you would get rejected for a loan are:
Credit score is too low.
Not enough recurring income.
Too many existing debts.
A personal loan can be used for a wide range of purposes, including but not limited to: debt consolidation, home improvement, adoption, medical expenses, buying large purchases, funding a small business and pet care. A personal loan must be used for a legitimate purpose.
The waiting period to reapply for a loan with a lender after being rejected varies depending on the lender, but is usually between 30 and 90 days. You can check with the lender to confirm the exact timeframe. It’s important to make sure you’ve strengthened your application to improve your chances of approval before applying again.
Leanne Escobal is a publisher for Finder. She has over 11 years of experience in financial services, specializing in content and marketing. Leanne has completed the Canadian securities course (CSC®) as well as the personal lending and mortgages course by the Canadian Securities Institute. She has a Bachelor of Arts (Honours) in English literature and creative writing from Western University.
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