Have you ever been denied a loan? It’s not always the most ideal situation when your loan application is rejected, especially in the face of financial uncertainty.
Imagine a scenario where, at the end of the month, you’ve already exhausted your salary and need immediate cash to pay for your car repair. In times of emergency, it’s best to fill out a quick loan application so that you can have access to the funds you need when you need them.
However, it’s entirely possible for the lender to deny your loan, especially if you have bad credit, leaving you stuck between a rock and a hard place.
But why do loan applications get rejected? What do you need to keep in mind to avoid being refused for a loan? This article looks at some common factors lenders consider before approving a loan.
1. Poor Credit History
Your credit score is one of the first things lenders check before deciding whether to approve your loan. A low credit score often signals poor money management, such as missed or late payments, loan defaults or high credit utilisation. These red flags could make lenders question your ability to repay on time.
Banks and financial institutions aim to avoid bad or non-performing loans, as they directly impact their bottom line. While there’s no universal minimum credit score in the UK, a score below 580 can make it much harder to get approved. And even if you are approved, your borrowing terms are likely to be far less favourable than someone with a credit score of 700 or higher.
2. Poor Income and Unsteady Work History
While lenders rarely state this outright, your income level and stability play a key role in whether your loan gets approved or rejected. It’s important to be realistic about how much you’re borrowing, which essentially means that your loan amount should be in line with your monthly income. If your income is too low to comfortably cover the repayments, lenders may hesitate to approve your application.
Those with irregular income, like freelancers or consultants, often face even more challenges when applying for personal loans. Similarly, if you’ve had a patchy employment history or frequently switched jobs in recent years, banks may view you as a higher-risk borrower.
3. A Lot of Existing Debt
Are you someone with an existing debt, such as a mortgage or student loan? Then you might find it difficult to get approved for a second loan. People who have high credit card debts might have the same fate. When your debt-to-income ratio is higher than the average, lenders might be sceptical of lending you further. It’s a common thought process that someone with high outstanding debt might default on the repayment.
Having a lot of outstanding debt also portrays you as someone who isn’t judicious with their finances, raising doubts and jeopardising your loan approval.
To calculate your debt-to-income ratio, add all your monthly instalments and divide them by your monthly income. Next, multiply the result by 100. If the final result exceeds 43%, your loan application will likely be rejected. The lower the debt-to-income ratio, the higher the chance of approvals.
4. Incorrect or Incomplete Loan Application
When you are in a financial emergency, it might be difficult to pay heed to the fine print. But, despite the situation, you must be very careful and take your time when filling out a loan application. This is because the smallest error or discrepancy can get your loan rejected.
You’ll need to furnish different details and documentation when filling out a personal loan application, such as proof of identity, address and income, bank statements and any other documents that the lender might ask for. If you fail to provide these documents or other necessary details, you could be looking at a failed loan application. Loans can be denied when borrowers furnish false information.
5. Multiple Credit Application
Lenders always run a credit check before pursuing a loan application. Each credit check conducted shows up on your credit report. Making multiple applications within a short period will reflect badly on your creditworthiness, making lenders wary of lending you money.
The second thing that might make it challenging to borrow is when your purpose for borrowing doesn’t meet the lender’s criteria. For instance, if you write a business purpose on a personal loan application, there is a high chance that it gets denied. A business loan differs from a personal loan, and mixing the two reduces your chances of borrowing.
Wrapping Up
To ensure quick and easy loan approval, improve your credit score by making timely repayments and utilising less than 30% of available credit. Having a longstanding account and being registered on the electoral roll also helps improve your creditworthiness.
One thing to remember is that you must pay attention when filling out a loan application, as discrepancies and forged details get you rejected. Payday loans, emergency loans and credit cards often have a faster approval period than personal loans. In a financial crisis, they might be more ideal compared to a conventional personal loan.