Your loan application may be denied because of poor credit history, lack of income, lack of collateral or high debt-to-income ratio.
Applying for a loan can be a stressful enough process, without even thinking about the fact your application to borrow money may actually end up being rejected. If this is the case, it’s possible many applicants won’t know which steps to take next.
- The first thing to do is look into the reasons your application may have been denied in order to prevent it from happening again.
- The most common reasons loan applications get rejected include a bad credit score or history or lack of verifiable income.
- Lenders who reject your application should give you a report detailing the reasons for your rejection.
Bad Credit History
When you apply to take out a loan, the lender is always required to look at your borrowing history in order to assess whether they are able to grant you a loan. This is usually reflected in your credit score.
Lenders will be looking to see a strong history of borrowing and repaying loans. This can sometimes be an issue if a borrower hasn’t borrowed money in the past, or has experienced problems when attempting to repay loans on time.
If this is the case, it is possible that your loan application will be rejected by the lender. In order to avoid rejection, applicants should try and maintain a good credit score, avoid borrowing money where possible and always make repayments on time if they have agreed to borrow money from a lender.
Lack Of Sufficient Or Verifiable Income
One of the key agreements when taking out a loan from a lender is the dates which the loan will be repaid by. In order to ensure that all applicants will safely be able to pay back any money owed, lenders must ensure that the minimum monthly repayments can be made by the borrower.
This is done through an assessment of work, income and investment on behalf of the lender. With some specific loans, lenders are legally required to assess the income of the person applying for the loan before agreeing to or denying the loan application.
If the lender deems that an applicant will be unable to repay the loan, they can reject the application. This may be because the applicant does not earn enough money or because their income cannot be verified through the information provided.
Lack Of Collateral
When applicants apply for a small business loan, lenders can look at the personal credit of the business owner. This usually happens when the business has not yet been established to a stage where it has accumulated sufficient credit.
The chances of getting a loan without business credit is not great unless the business owner is willing to personally guarantee the repayment of the loan. Alternatively to this, the business owner can also pledge personal assets which are valued at the amount of the loan as a form of collateral.
High Debt-to-Income Ratio
A debt-to-income ratio compares how much money an applicant owes every month alongside how much an applicant earns on a monthly basis. Most lenders will asses the debt-to-income ratio of an applicant to ensure that they will be able to repay the loan.
If the lender does not believe that the applicant is capable of repaying the loan due to this ratio being high, the loan application will usually be rejected.
If an applicant is unfortunately denied a loan, the lender should provide a notice of adverse action. This means that they should give you the reasons why your loan application has been rejected, the source of information used against the applicant and useful information on how to access credit reports.
Accessing credit reports can mean that the applicant will be able to dispute any inaccurate information and better understand the reasons for the rejection.