6 Reasons Why Your Personal Loan Application Is Denied
There are numerous reasons to be denied a loan and these range from a borrower’s financial history to the choices made when seeking a cash boost from a lender.
Six of the most common reasons are detailed below along with advice on what to do if your loan application is denied.
1. Unstable Employment
The most important consideration for any lender is that a borrower can reliably repay the loan. With this in mind, irregular earnings are a big red flag that suggests to the lender that a full reimbursement might not be possible.
That’s why it’s common practice these days for lenders to include conditions in their eligibility criteria. For example, some state that an individual should be in their current job for at least one year. If a borrower doesn’t meet this requirement then their chances of securing a personal loan are greatly reduced.
A borrower who has recently changed jobs might discover that their application was rejected. Moreover, someone not in full-time employment will need other forms of revenue, such as interest payouts or rental income.
2. Bad Credit History
An individual’s credit score varies from 300 to 900. As a general rule, if a borrower’s score is 750 or higher then their chances of getting a personal loan approved are very good. Although, anything below 450 will most likely result in a declined application.
If having a poor credit history jeopardizes an application then the same can be said of a borrower who hardly has any credit history. Not previously being attached to financial products, such as credit cards, can leave lenders feeling like they’re in unknown territory. This typically makes them wary and more hesitant to lend to you.
Thankfully, there are ways to boost a rating. These include paying off existing debt and closing accounts that are no longer in use. Bear in mind that a credit score is always fluid and never set in stone.
3. Low Income
Lenders will usually have a minimum income requirement. If borrowers don’t meet this threshold then their applications will be quickly turned down. The reasoning behind this is very straightforward. If a lender believes an individual can’t afford to reliably meet repayments, they’re therefore considered too high of a risk.
What’s less logical is that most lenders don’t publicly make this information known and this can necessitate an application to be submitted in order to discover how low or high the bar is set. It’s important to note that multiple rejections can be harmful to a credit score.
An individual’s debt-to-income ratio is also a key factor. This is determined by dividing total monthly debt payments by monthly gross income.
4. Took Too Many Loans
Assessing how much debt a potential borrower has previously accrued brings to mind a Goldilocks analogy.
Too few credit cards or other loans in a credit history check can leave a lender cold. Too many will have the borrower deemed far too hot to handle.
The first situation can be resolved quite easily. The borrowers will need to boost their credit profile by taking on more financial responsibility. The latter unfortunately is much more difficult to overcome.
Borrowers who have several loans already in their name are more likely to default on their financial obligations. Moreover, a debt-to-income ratio is used to determine this possibility.
5. Inaccurate Details On Credit Report
When filling out a loan application, it’s essential that you fill in the forms correctly. Fail to do so and rejection will almost surely follow. Even the most basic mistakes, such as putting down a wrong date of birth, can see a loan denied.
Errors can be costly, therefore make sure to triple-check all information before submitting the application. Additionally, discrepancies on a credit report can have a negative impact on a borrower’s chances of approval.
If inaccuracies are found, it’s advisable to contact the relevant credit bureau and request they’re amended. Additionally, pay close attention to loan application guidelines.
6. Multiple Applications And Rejections
Applying numerous times for a loan is entirely counter-productive. It can result in an individual’s credit score plummeting.
Each application results in a lender contacting the borrower’s credit bureau. The bureau is then obligated to view this as a ‘hard inquiry’. This subsequently shaves points off a credit score.
If this hard inquiry leads to a denied loan application, then it might only get worse from here. Future creditors will see the many loan applications denied and wonder why.
It’s more sensible to approach a number of different lenders and compare options accordingly.
There are various reasons why a personal loan might be declined. A borrower may have a poor credit history or an erratic employment record. They may have already taken on too much debt or applied for a loan amount that’s unrealistic given their finances. They may simply have written down their name wrong on the documentation.
Fortunately, there are steps that can be taken to remedy the situation. Most importantly, a borrower needs to understand why the loan was denied. After proper preparation and research, an approved loan is possible.