There are all sorts of reasons you might want to apply for a personal loan. Maybe you’re trying to make a big purchase, like a car or home, and need some financial help. Or maybe you run into some sort of emergency expense and come to realize that your savings are a little too low to deal with it out of pocket. Whatever your situation may be, a personal loan may provide a potential solution to your cash flow issues.
So, if you’ve come to the conclusion that you need a personal loan, you apply for one, and you aren’t approved, it can be a tough pill to swallow. But why were you rejected in the first place? And what can you do to improve your odds next time? Without knowing the answer to this first question, it’ll be hard to answer the second. So, with that in mind, let’s walk through why you might want to consider applying for a personal loan in the first place, some common reasons for loan rejection, and some things you can do that may improve your chances of personal loan approval down the line.
Why Would I Consider Applying for a Personal Loan?
Before you actually apply for a personal loan, it’s important to have a good understanding of when it might be a good idea to consider applying for a personal loan, and when it isn’t. After all, taking on debt can have some significant implications to your finances, so you’ll want to make sure you approach it with an informed perspective.
Generally speaking, it might be something you’d want to consider if:
- You need help with a big purchase, or
- You’re facing an unexpected expense that you need to deal with right away.
There could be more reasons than these, but these are two broad categories that you might come up against at some point down the road.
For starters, like we mentioned, a personal loan can be useful if you’re making a substantial purchase. For example, if you’re looking to buy a home or property of some sort, there’s a good chance you won’t be able to pay for it out of pocket. In this case, you would apply for a mortgage. This is a type of installment loan that you’ll need to pay back over the course of several decades. Another example of a large purchase that might require you to apply for a loan would be a car, which could require an auto loan.
A personal loan can also be used as a safety net to help you deal with a financial emergency when your savings run short. What you consider to be an emergency is going to be somewhat specific to your situation, but there may be some general things that fall into this category for a lot of people, including:
- Emergency car repairs
- Unexpected medical expenses
- Unplanned home repairs
Like we mentioned earlier, it’s also important to know when you shouldn’t apply for a personal loan. You shouldn’t take on debt for things like vacations, discretionary expenses, or for long-term savings goals.
4 Reasons Why your Personal Loan Application Might Have Been Rejected
If you have plans to apply for a loan, it’s a good idea to get a sense of what financial institutions look for when considering your loan application. If you’ve already applied and your application has been rejected, this may give you some idea of why you’ve been rejected.
1. Bad Credit History
One of the most important aspects of your financial profile that a financial institution is likely going to look at when you apply for a loan is your credit history. This gives them some indication of your general creditworthiness and how responsible you’ve been with credit in the past. In most cases, the lower your score, the harder you might find it to get approved for a personal loan.
Having said that, there are some financial institutions that may not weigh your credit history as much as certain other aspects of your profile, so bad credit won’t necessarily keep you out of the market. Just keep in mind that these loans may come with fairly high interest rates, so you’ll want to avoid applying for these unless it’s your only option and you know you’ll be able to afford to repay what you’ve borrowed.
2. Your Income is too Low
On top of your credit history, your income is likely going to be one of the most important factors that a financial institution is going to use in their decision-making process. Basically, they want to know that there’s a high chance that you’ll be able to afford to repay your loan, and your income is going to be a big indicator of this.
In order to provide proof of income, you may be asked to show pay stubs. This will prove that you have legitimate employment and that, in theory, you should have enough money to meet your loan payments.
3. You’re Already Carrying a lot of Debt
Even if you make more than enough income to meet your loan payments and you have a solid history of repaying your debt, a financial institution might have an issue approving your personal loan application if you’re already carrying a lot of debt. It’s possible that they’ll have a particular debt-to-income ratio threshold that they look for, and if yours exceeds this, they may reject your application.
4. You’re not Old Enough or you Don’t Live in a State they Service
On top of the aspects of your financial profile that we mentioned above, there are also some logistical things that may keep you from getting approved for a personal loan. One basic factor is your age. For all financial institutions, you’ll need to be at least the age of majority in your state to qualify for a personal loan.
On top of this, some institutions may only service certain states. So, if you live in Texas, you’ll want to make sure that you look for personal loans offered in Texas. If you apply for a loan from a financial institution that doesn’t service your state of residence, your application will get rejected.
What Should you do Before Applying for a Personal Loan?
If you’ve been rejected before or you’re gearing up to apply for a personal loan for the first time, there are some things that you can do ahead of time that may help to improve your chances of getting approved, or at least give you an idea of what you might qualify for.
1. Get your Documents in Order Ahead of Time
When you apply for a loan, a financial institution is going to need some documentation of some sort. This could include things like personal identification, proof of residence, tax returns or pay stubs, verification of employment, and more. By having this information on hand in advance, it can help to speed up the application process.
2. Figure out What you can Afford
To help you avoid running into a situation where you apply for a loan amount that you can’t afford to repay, look for a personal loan calculator online to figure out what you can afford to repay. You’ll likely need to input information like your monthly principal and interest rates, and from there you may be able to get a better idea of what you can afford to repay based on how much money you have coming in.
3. Pay Off your Current Debts
Like we mentioned, if you’re carrying a lot of debt, this may make a financial institution evaluating your financial profile think twice about approving your application. So, in order to help your chances, you may want to spend some time and resources paying off your debt. On top of that, if you can manage to increase your income, this can improve your debt-to-income ratio and may improve your chances of personal loan approval.
4. Work to Impact your Credit Score
We know that your credit score can be hugely important factor when applying for a personal loan, so it’s a good idea to try to do what you can to impact it. While your credit score is a dynamic number that’s influenced by all sorts of things, you may want to focus on things like paying all your bills on time, paying off your debt, avoiding applying for multiple loans in a short period of time, and more. To get a better idea of what else you can do, spend some time learning more about what impacts your credit score.
We understand that getting rejected for a loan can be difficult to face, it doesn’t have to be the end of the road. While the things we’ve listed above may be able to help you improve your chances of personal loan approval, most efforts to this end are going to take time, patience, and effort. Just do your best to consider why your application was rejected, try to identify the specific reason or reasons, and do what you can to improve your financial standing.
Posted in: Personal Loans