If you have been denied a personal loan, that sting of rejection can surely hurt. It is true that the recession certainly has made lenders re-examine their lending practices and policies, and that personal loans are not as easy to qualify for today as they once were. What you need to ask yourself is what do you do after you have been denied a personal loan? You should hold off on applying for another loan until you can address the reasons why you have been denied a loan in the first place. Once you learn why you have been denied, you can then address the issues so that the next time you apply for a personal loan or other financial product, you can apply confident that your application will go through. Below are some of the top reasons for denials of personal loans.
Debt To Income Ratio.
Your debt to income ratio is the percentage of your monthly income which goes towards your monthly debts, such as loan payments, car payments, leases, credit card payments and other debts. The general rule of the thumb here is that your debt to income ratio should be no more than 38 percent of your monthly income. A few select lenders do show some leeway here, if you have other factors that can help to negate this, such as having excellent credit, high savings or a high income. In these cases some lenders allow up to a 45% debt to income ratio, but you should not count on any lender ever offering you that, instead try to stick to the 38% debt to income ratio example. You can easily add up your debts and figure out your debt to income ratio. If your debt to income ratio is too high you should work on lowering it to below the acceptable threshold, before applying for any loan.
Payment History and Charge Offs
Every lender puts a high emphasis on your past payment history with other creditors. It is reflected directly on your credit report in black and white, there are no shades of grey here. Late payments count heavily against you, but not as much as a charge off does. A charge off is where the creditor has written off the debt and possibly even sold the debt to a 3rd party such as a collection agency. If you have any charge offs on your credit report, you should address those by paying them off, unless you have less than a year to go before they fall off of your credit report. Remember all bad debts fall off of your credit report after a period of 7 years. If you do decide to pay off a charged off debt, try to pay it back in full, as partial payment settlements are marked as “settled in full” on your credit report. Accounts settled in full do not give you the level of credit repair that paid in full accounts do.
Poor Credit History
This is easy to fix as far as top reasons for being denied a loan go. For many people it simply can be having to few open accounts. The other major factor here is too low of a credit score. Most lenders are looking for credit scores of 620 or higher for personal loans. It is not difficult to make your score rise above 620. I once had credit issues and was able to raise mine from a 540 to 660 in less than 6 months. The key here is to reduce your credit utilization and to also have enough open accounts on your report that lenders can better gauge how responsible you are. You should pull your credit reports as well, since upwards of 25 percent of all credit reports contain errors which lower your score. Should you find any errors you should dispute them and have them removed from your credit report. With time and dedication you can turn a poor credit history into a fair credit history.