Why Can’t I Get a Loan? 7 Common Reasons You May Be Denied

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Financing isn’t guaranteed. Lenders can deny you a loan for many reasons — and the most common?

• Bad credit
• No credit
• High debt levels
• No proof of income
• Rocky employment history
• Misusing the loan funds
• Red flags on your credit report, like a past bankruptcy

Fortunately, there are steps you can take to improve your loan approval odds if you keep getting denied. 

How Lenders Decide if You Qualify: 7 Things They Check

While underwriting specifics vary, lenders almost always consider these criteria during their application process — and failure to meet any of these asks is a common reason for a loan denial.

1. Credit Scores

Most lenders require at least good credit for approval, with the best terms reserved for applicants with excellent credit scores, around 760 or higher.

You’re more likely to get your loan denied if you have fair or bad credit, which is around 669 and below.

2. Credit Reports

Credit scoring models base your credit score on information on your credit report. Sometimes, that information may give a lender pause, even if your score is in an acceptable range.

For instance, you may have an old bankruptcy that needs more time to fall off your credit report. Alternatively, you may have too many recent credit inquiries, suggesting to the lender that you’re taking on more debt than you can afford. 

3. Income 

Requirements vary and aren’t only restricted to an amount. Lenders also consider your employment status, length and type — such as self-employed vs. traditional employment. Blips in these areas can lead to your loan getting rejected.

4. Current Debt Levels

Lenders may reject applicants with debt-to-income ratios (DTIs) over 36% and credit utilization rates of 30% or higher.

Your DTI is how much debt you have compared to your income. The more debt you have, the more your percentage goes up.

5. Loan Amount 

Lenders might cap financing at a certain amount, which is typically $50,000 for personal loans, or require a minimum to borrow. If you’re outside those windows, you may fail to get financing. 

You can also get rejected if your requested loan amount isn’t supported or justified by your current income. 

6. Loan Purpose 

Sometimes lenders have restrictions on what you can finance. For instance, you generally can’t use a personal loan to pay for investments, college tuition, down payments or business expenses.

7. Collateral

Secured loans specifically require you to back a loan with your own funds or assets, so, in this case, not having enough funds saved can lead to a denial.  

Credit Score and Loan Denials 

Your credit score is effectively a quantitative measure of your likelihood to repay a loan as agreed. Bad credit, a score of 600 or less among major models, results from past missteps, like late payments, loan defaults or collection accounts. It suggests to lenders that you might have an issue paying off debt in the future, which may give them pause why loans can get denied.

Fortunately, bad credit doesn’t have to last forever. You can improve a bad credit score by utilizing the following strategies:

• Bring accounts with delinquencies up to date. These can hurt your credit. Plus, you’ll want to avoid adding potentially more negatives, like collection or a charge-off, on your credit report.
• Pay off debts in collections. While a paid collection account can stay on your credit report for up to seven years, its effects on your score lessen once it’s no longer due. In fact, some credit scoring models ignore paid collections entirely.
• Pay down high balances. You should do this especially if your credit cards are bumping up against their credit limits. 
• Set up autopay. Use autopay or give yourself due-date reminders so you don’t miss new loan payments.

Income, Employment and Loan Approval 

You need to make money to pay back money, so lenders generally have minimum income standards, though there’s no universal cutoff. It’s fairly standard, however, for lenders to base approval on a debt-to-income ratio no higher than 36%. 

Income can affect your odds of loan approval in other ways, including:

• Lenders will consider your income in relation to the size of your loan — meaning your earnings can affect the amount you can borrow.
• Gaps in employment or inconsistent income can make it harder to qualify.
• Most lenders often require extra documentation for self-employed borrowers, including profit-and-loss statements or two years of tax returns.

What To Do If You’ve Been Denied a Loan 

Loan denials sting, but they’re not absolute. These steps can help you determine why the lender rejected your application and how to avoid a repeat issue.

Find Out Why the Lender Denied Your Application

That way, you know what to fix and how to bolster your approval odds. Keep in mind that federal law requires lenders to provide written explanation of why they denied a loan — or your right to request this explanation — within 60 days of a rejection.

Check Your Credit Report 

This step can also provide invaluable clues as to why the lender denied your loan application. It’s particularly important if the denial was a surprise as there could be an error on your credit report. 

You can get free credit reports at AnnualCreditReport.com and dispute credit report errors by contacting the creditor or credit bureau.

Consider a Co-Signer 

Lenders are often more amenable to borrowers with bad credit or limited income when they have a willing co-signer.

Consider some of the downsides to being a cosigner before asking someone to add their name to your loan.

Look into Credit-Builder or Secured Loans

These financing types are designed to help borrowers with no or bad credit demonstrate their ability to repay and secure future financing. 

Credit-builder loans, for instance, typically last between six and 24 months and can sometimes improve your credit by 30 to 60 points in the short term. 

How To Improve Your Chances of Getting a Personal Loan 

The following adjustments can improve your loan approval chances and ultimately net you the necessary financing.

Improve Your Credit Score 

You can improve your credit score by paying off down debt and staying on top of your loan payment deadlines. Try to avoid applying for new credit for at least 45 days.

Lower Your DTI Ratio 

Aim to get your DTI ratio below 36%. You can pay off high off high credit card balances or find new ways to generate income.

Pro Tip: Getting Rid of Higher-Interest Balances

Try transferring some of those higher-interest balances to a no-interest credit card. You might even be able to negotiate a lower interest rate with your credit card issuer or lender if you’ve got a solid payment history.

Document Your Income 

You can use bank statements, tax returns, pay stubs or W-2s as proof of income.

If you’re self-employed or make money from side hustles, showing that you have a source of income can be a bit tougher without reoccurring pay stubs or W-2s. But you can show your tax returns or bank statements as that proof of income.

Choose the Right Lender 

All lenders have different underwriting standards. Some are more willing to lend to risky borrowers than others.

Similarly, if your denial is related to a loan mismatch — say you need $50,000 and the lender caps borrowing at $25,000 — you’ll need to find a lender that’s willing to lend the amount you need.

Try for a Smaller Loan Amount 

Lenders are often quite strict when it comes to lending a lofty sum of money. If your income or credit is thin, you can sometimes still get approval by asking for a smaller loan. This step can also help if your DTI is the problem.

Alternative Ways to Get Financial Help 

Try these alternative financing sources if you have trouble getting a personal loan.

• Personal loans from credit unions: Credit unions often have different approval processes, so they can be more flexible than the larger banks, making your approval odds better. You can start your search with this list of the best credit unions for personal loans.   
• Peer-to-peer lending platforms: These marketplaces anonymously match borrowers and lenders via a computer algorithm and can have easier application processes. However, there are drawbacks to peer-to-peer lending, most especially the high interest rates they impose.
• Borrowing from family or friends: Put a written payment plan in place to prevent the financial relationship from affecting your personal one.
• Side jobs or gig apps: The best side gigs include online instructor, bookkeeping, consulting and handyperson work. 

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