High debt-to-income ratio
A high debt-to-income (“DTI”) ratio could set back your personal loan plans. This ratio compares your monthly debt total with your monthly gross income. For example, monthly debt payments of $3,000 on a monthly income of $5,000 lead to a DTI ratio of 60%. A high DTI ratio can negatively affect your credit, and it may signal to lenders you could have trouble affording debt repayment.
In general, your DTI ratio should be 35% or less. Many DTI ratios in this range indicate that you are an attractive borrower.
Insufficient or unstable income
When deciding whether to offer a loan, a lender will investigate your recent income history to determine if you can repay them. They may reject your application if they deem your income insufficient or unstable. From the lender’s perspective, a borrower with unreliable income has a higher chance of defaulting on the loan when the monthly payments become unaffordable.
Basic requirements are not met
Basic requirements vary among lenders, but in general, you must have three primary qualifications. Before applying, make sure to review the lender’s requirements and ensure the following:
- You are at least 18
- You are a U.S. citizen (or have qualifying documentation that proves your permanent or non-permanent U.S. residency)
- You have proof of income and meet the requirements for creditworthiness
Actions to Take After a Personal Loan Denial
If your personal loan gets declined, review what you can do to improve your chances the next time you apply.
Review your decline notice
The decline notice you receive includes the reasons for your personal loan denial. Review this notice and identify what needs to be fixed before you resubmit your application.
Review your credit report
If the loan decline notice cited issues with your credit, try requesting a copy of your credit report to figure out the problem. You are entitled to a free credit report every 12 months from each of the three major consumer reporting companies.
Build your credit before applying again
You may need to take time to build your credit before applying for another loan. Remember to review how to build your credit, including paying down your credit card balances and keeping a diverse credit mix.
Apply for a lower loan amount
If you’ve been denied a loan, the amount you requested may have been too high, so seeking a lower loan amount may help your next application. Evaluate your budget and consider using a personal loan calculator to figure out how much you can afford to spend on a monthly payment.
This will help you find a loan range you may be more likely to be approved for, help you get a picture of your current financial situation and prevent you from taking on more debt than you can handle.
Pay down debt
Your existing debt is important to lenders when they look at how much you owe relative to your monthly income. Paying down debt improves your DTI ratio and makes you look more creditworthy as a borrower. Doing this will also free up more monthly income to repay a new loan.
You may consider the debt snowball method. With this approach, you pay off the smallest debt first, then the next-smallest debt and so on. Conversely, the debt avalanche approach involves paying off the highest-interest debt first before paying off the next highest-interest debt. The avalanche method could help minimize interest costs, while the snowball approach offers short-term wins that could keep you motivated over time.
Personal Loan Denials: Bottom Line
The loan application process has several pitfalls that could limit your ability to qualify. Careful planning and patience are vital in ensuring you can reapply for a loan after being denied.
Frequently Asked Questions
How long should you wait to reapply after a loan denial?
For several reasons, it may be wise to wait several months before reapplying for a loan following a denial. First, every time you apply for a loan, the lender conducts a hard credit inquiry that could temporarily impact your credit score. Being subject to several hard credit inquiries could potentially harm your credit.
It also takes a while to increase income and improve your financial situation. Building credit is not an overnight process, and lowering your DTI ratio can take time.
If your loan application was declined because of an error you made on the application, you should contact the lender immediately to address the mistake and rerun the application.
How many times can you apply for a personal loan?
There isn’t a set number of times you can apply for a personal loan. But the more you apply, the more hard inquiries into your credit file you’ll be subject to, which could negatively impact your credit.
How does a declined personal loan affect your credit report?
Getting declined for a personal loan does not show up on your credit report or impact your credit by itself. Again, the biggest concern is the hard inquiry into your credit file that occurs when you apply. The rejection itself does not affect your report.
Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
