6 Common Personal Loan Rejection Reasons

1. Bad credit history

When it comes to any loan—mortgage, student loan, or personal loan—credit history is the number one factor lenders consider. Your credit history is the primary way lenders evaluate how likely you are to repay (or default on) a loan. If you’ve had credit hiccups in the past (e.g., past due accounts, collections, bankruptcy) your credit score may not meet the lender’s minimum requirements.

2. High debt-to-income ratio

Even if your credit history is OK, and you have made all your monthly payments on time, you may have your loan application denied if your debt-to-income ratio (the sum of all your debts divided by your monthly income) is too high. Generally, a low DTI (under 40%) signals to lenders a healthy balance of debt to income.

To calculate your debt-to-income ratio, add up all your current debt—including credit cards, auto loans, and student loans—and divide it by your income. If your DTI is too high, paying down debt drops your credit utilization ratio and improves your debt-to-income ratio, increasing your chances of approval.

3. Unstable employment history

Lenders generally want to see that any income listed on your application has been consistent, so they can assume it will remain so moving forward. This means if you have different pay stubs, recently changed jobs (in the last 60 days), or have freelance work from multiple employers, it may create a snag in your income calculations.

If your income fluctuates because you’re self-employed or do seasonal work, that doesn’t mean your application will always be declined. While your paychecks may not be consistent or predictable, some lenders may be willing to look at your past tax returns so they can compare your income over a longer period of time.

4. Minimum income requirement not met

Along with income stability, lenders look for proof of income to verify you have the ability to repay what you borrow. If your income is below the lender’s threshold, you may be denied or offered a loan for a lower amount.

Make sure you include all forms of income in your next application, including any income from side gigs, investment accounts, or child support payments.

5. Loan purpose mismatch

Personal loans provide a lot of flexibility in how you can use the funds. However, some lenders may not allow you to use them for certain things like secondary education (i.e., college tuition), for making investments such as in stocks, or anything illegal or partially illegal (i.e., gambling).

Make sure the loan application matches your purpose. For example, if you need funds for a professional certification or training, looking into a private or federal student loan may be more appropriate.

6. Missing information or paperwork

Loans almost always require several forms of paperwork, including employment and income information (including tax returns, pay stubs, or bank statements), a credit report, government-issued ID, and in some cases collateral documentation. If you are missing some of this information you are essentially guaranteed to get denied.

Make sure all of your paperwork is in order before you apply for a personal loan again. You may end up not needing some of it, but better to have it handy just in case.