These four reasons explain why you were denied credit on a personal loan and what to do about it
We looked through loans made on Prosper and Lending Club last week to sort out some of the biggest factors that affect your interest rate on a personal loan. The information led to some great ways to lower the rate on your loan but missed out on something just as important.
What we didn’t see was the top reasons why people are denied credit altogether for their personal loan.
I’m digging into Lending Club’s rejected loans file this week to see why people get declined for a loan and if there’s anything you can do to improve your chances. Prosper doesn’t release its data on denied loans but the largest peer to peer lender in the world provides a file of more than one million rejected applications.
It doesn’t include as many factors as the approved loans file but there’s still some interesting tidbits that can help you get the money you need.
Once you understand the factors that go into approving a personal loan, you can use them to get approved and get the best rate possible! Click to check your rate for a loan on Personal Loans with this instant approval tool.
Why do People Get Denied Credit on a Loan?
The loan rejection file includes only six factors, far less than the dozens of factors we see on approved loans. These denied loans were rejected after the borrower filled out just some basic credit information so we don’t have their whole credit report to analyze.
The denied credit loans includes the requested amount, a Lending Club risk score, the borrower’s debt-to-income ratio, state of residence, employment length and why they needed the loan.
The most interesting finding was the numbers behind declined credit by requested use. Loans for debt consolidation made up 46% of all those denied credit, seemingly high until you consider that consolidation makes up 85% of approved loans. By comparison, business loans make up a very small portion of approved loans but a higher rate of denied credit. Seems the platform favors borrowers that are requesting money to pay off loans rather than to start risky business ventures.
My favorite loan use on one borrower’s application…“Trying to come back to reality!”
Higher debt-to-income ratios were another factor in getting denied credit. Rejected borrowers had a median 19% debt to their income while those approved had just 16% of their income in debt payments. This makes sense and was also one of the biggest factors in getting a better rate on your loan.
Another important factor for credit approval seems to be employment length. The majority of denied loans (89%) were to borrowers with less than a year employment. Looking at data from last week, only 8% of the loans approved were to people with less than a year employment. The lesson, wait until you are at your current job for at least a year to apply for a personal loan.
The amount of loan requested doesn’t seem to be a factor in denial. Rejected loans had an average request of $15,000 while last week’s data showed an average of $16,000 for approved loans.
The borrower’s state of residence also didn’t seem to be important in getting credit. California, Texas and New York accounted for 30% of the loan rejections but also accounted for about a third of approved loans. You might find something deeper in the numbers if you look at average incomes across the states and poverty levels but that’s a different matter.
What You Can Do If Your Loan Application is Denied
A few points come out in both the approved loans and those that were denied credit that might help you improve your chances at a loan.
While we didn’t see a FICO credit score in the rejected loans file, it’s surely a factor and probably built into the websites ‘risk score’. It can take years to boost your credit score a few hundred points for really great rates but you can increase your score enough for big savings in less than six months. Check out this list of 21 ways to fix your credit score fast or download our free report on the six steps I used to add 140 points to my FICO score.
The loan amount you request might not be a factor in whether its approved or not but it does affect your interest rate. Only ask for as much as you need and consider using your loan to pay off higher-interest rate credit cards.
Using your loan for debt consolidation may help to lower your debt-to-income ratio if payments are lower than your combined monthly credit card bills. A consolidation loan will also improve your debt availability and the types of credit on your report to help increase your credit score.
Click to check your rate on a loan now – debt consolidation loans up to $35,000 from Personal Loans
It's All About Doing Your Research
If you have been taking out loans for a while, then you probably know how to deal with the stress that goes along with filling in loan applications. However, if it is your first time applying for one, then dealing with being turned down may be more stressful than you thought it would ever be. When facing an application denial, what can you do?
While you may feel like all is lost after being rejected, it's important that you remain positive and look into other options. If you have been turned down from the same lender multiple times, then it might be time to try with an entirely different one. Alternatively, if there are favorable reviews regarding one of the companies you have already tried, then it is worthwhile to go back to them. When looking into your options, check out a few different online review sites or contact people that you know with loans from other companies.
These companies are in business for the sole purpose of lending money out – obviously, they want their applicants to be happy so that they will continue to use them. That said, just because you were rejected from one company does not mean that others are going to deny you as well.
Debt is something most people don’t realize they need until they’re denied credit and can’t get money for something important. Understanding why loans get rejected and what goes into your interest rate is the first step in using credit wisely.
Read the Entire Credit Series
- How to Start a Business on Bad Credit
- How to Fix My Credit to Buy a House
- How to Destroy Derogatory Accounts on Your Credit Report
- How to Get Peer-to-Peer Online Loans with Bad Credit
- How to Apply for a Loan If You Have Bad Credit
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.