When you have a financial goal but you are low on funds, one common solution is to get a loan that will enable you to achieve that goal. The capability to obtain a loan is something that benefits you while impacting your finances. However, not everybody can get the loan they apply for due to loan denial.
This can be frustrating for a borrower and push them to find a solution. This is why we have carefully designed this article to help you understand the common reasons for loan denials and the best solutions. So, join us as we explore this world.
Understanding Loan Denials
Before one gets a loan, they apply for it at a legal loan institution such as a bank, credit union, and others. The borrower will then have to approve their application before the lender can secure the loan. Loan denials are cases where the application is not approved.
This is often disappointing and somewhat confusing for the lender, especially when they have a legitimate reason for the money. However, this doesn’t happen due to bias but often because the borrower did not meet the lender’s standards and criteria when applying. If you get denied a loan, then what you have to do is find out the reason and a solution for it.
Common Reasons for Loan Denials
There are several reasons why a person can be denied a loan. Most of these reasons are attached to a person’s creditworthiness and financial profile. Here are some of the common reasons:
Poor Credit Score History
One element that lenders check when you apply for a loan is your credit score. Your credit score is what a lender will use to determine how you use and manage money. When your credit score is too low or poor, it shatters whatever hope you have of obtaining a loan as most lenders will not be inclined to do so because they only believe in good investments and returns. A low credit score equals a higher risk that most lenders will not take.
Your credit score is often factored by the amount you owe and your payment history. If you apply for an unsecured loan without collateral, then the requirement will be stricter. Some types of loan accept minimum credit score. However, if you get approved for this with a low credit score, then the lender will charge a higher interest rate to protect themselves against the possibility of not getting the repayment.
Insufficient Income
Another factor that lenders consider before approving a loan is income. They want to know that you can make monthly payments without defaulting, so they often require a sufficient and stable income before approving. They assess your income to find out if you’d be capable of making repayments. If they conclude that the amount you want to borrow will not be met with your income or it is not stable every month, then your application might be rejected.
High DTI Ration
DTI or debt-to-income is a ratio that measures monthly debt payments with monthly income and another factor that can make lenders deny loans. When a DTI is too high, it indicates that a great portion of a person’s income is used to repay debts. Visit https://forbrukslånlavrente.com/trenger-penger-får-ikke-lån/ to find out more about the DTI and how it affects your loan approval. This signals to a lender that you may struggle to repay and then deny your application.
High Amount
If you apply for a high amount that you cannot pay back, then you may be denied. Lenders approve a loan based on borrowers’ income and their debt obligations. So, when they review your finances and they are not satisfied with your finances for the amount you are aiming to borrow, then your application will be denied.
Inaccurate or Incomplete Information
Lender depends on the information you share to either approve or deny a loan application. They review the information to evaluate your creditworthiness before making their decision. So, in a case where you submit inaccurate or incomplete information with your application, it can be denied.
Failure to Meet Basic Requirements
Different lenders have their set of requirements. However, there is a basic requirement that cuts across all types of lenders. If these requirements are not met, then your application will not be approved. Some of these include:
- Being of legal age which is 18
- A legal citizen of the country
- Secured employment with an accurate bank account
Solutions to Improve Loan Approval Chances
If your loan has been denied, then you need to identify what went wrong. You can ask the lender about this. Once you have identified the reason for the denial, then you need to take action to avoid this and improve your chances next time. Below are some strategies that can help you:
Improve Your Credit
If you want to improve your chances, then you need to improve your credit score. To do this might take a long process but it will be worth it in the end. You will have to get a copy of your credit report from the credit bureaus and then review the report carefully for errors, negative items, or discrepancies. If you find any inaccuracies such as inaccurate payment ensure that you make a report to the credit bureau.
A credit score that is 700 and above is a relatively good one that can get approval from lenders. So, if yours is not up to that figure, you need to build it up and continually work to maintain it. One way to do that is by consistently making your credit card payments on time. To ensure that you don’t miss out on the due date of payment, you can set up automatic payments or reminders.
Also, it helps to keep your credit card use low because a high credit balance can harm your credit score. Prioritize keeping your credit card use as low as 30%. You will also need to avoid closing old accounts because a long credit history helps to boost your credit score. So, keep your old account active to sustain your credit history.
Work on Your DTI
As we earlier discussed, your DTI plays a crucial factor in your loan approval or denial. So, if your DTI is high, you need to work on that. For you to do this you have to find out your current DTI. All you have to do is to calculate it by adding your monthly debt payments such as credit cards and then divide it by your monthly earnings.
Your DTI is favorable for you if it is low, so work to reduce it by creating a better debt payment plan and focus first on repaying debts with high interest. Furthermore, having a pending debt can be bad for you when you apply for a loan. This is because it only makes your DTI higher and makes lenders concerned. So, you need to avoid making major purchases on credit or opening new accounts before applying.
Boost Your Income/ Financial Stability
Your chances of getting approval can be improved if your income gets higher. So, find out the opportunity to increase your earnings. You can freelance or work as a part-timer to achieve this. Since lenders favor applicants with stable finances and employment, avoid changing your job frequently to indicate stability.
Request Workable Amount
Since lenders deny applications of people with lower income and higher loan amount requests, it is best to request a workable amount. To be sure of what a workable or realistic amount is for you, try including the loan monthly payment into your budget. If it’s something you can afford, then you can apply for that amount.
Make Your Application Strong
Your application contains your credit score, financial profile, and other important information. It is what will sway lenders to approve your application. So, you need to make sure that it is a good one. Before you apply, check and compare different lenders to get one that matches your needs and you’d easily meet their requirements.
Inaccurate or incomplete information is something that can make a lender deny your loan. So, ensure that you carefully gather and prepare all the documents you will need such as bank statements, tax returns, income proof, and other essential documents. A good strategy to sway the lender with your application is by writing a persuasive application letter. Your letter can explain better to the lender why you need that fund and the way you plan to repay it.
Get a Cosigner
Applying with a cosigner is another great strategy to get a lender’s approval. However, it is best that you do so with a cosigner who has an excellent or good credit score. This will help reduce the chances of being denied and secure a good interest rate.
Before you make someone cosign with you let them know of the implications. Explain to them what would happen to their credit score if you make late payments. This way they will know what they are getting themselves into.
Seek Counsel from Professionals
If you are still confused about certain things or want guidance in improving your credit score or financial situation then you can seek a financial advisor for this. If you are curious about financial advisor, you can check here to know their job description. Whoever you meet has to be someone reliable and experienced.
Conclusion
Loan applications get denied not due to bias, but because of different reasons. Lenders want to be sure that you will repay before they approve. So, they are meticulous when reviewing your application. If your credit score is low, DTI is high, or you have incomplete or inaccurate information on your application, then your application might be denied.
This is why you need to be careful before and when applying. You need to make sure your credit score is good enough and your DTI is low. In this discussion, we have shared several strategies that will increase your chances of getting your loan application approved.
