Applying for a loan can be a stressful process.
Receiving a loan approval notice is worth the paperwork. But sometimes loan applications can be rejected. Follows are possible reasons why your loan could have been rejected.
Why was my loan application rejected?
Understanding why your loan application was denied will help you figure out your next steps. Possible reasons could be the following;
Bad or no credit history
Your credit history is one of the main factors that influence a lenders decision to approve or deny your application. A bad credit history with missed payments can lead to a loan rejection. Having no credit towards your name can also show lenders that you’re not able to support a loan at this time. As you need to show that you are able to make payments on time and not default on a loan.
Credit score checks
A low or negative credit score can lead to rejection as it is an indicator that you could be too high a risk to lend money to. For example, missing repayments on a previous loan could lower your credit score and show up on your credit report.
Knowing your credit score before you apply can help you apply towards loans that you know you’ll be able to afford. However, performing too many hard credit inquiries can significantly lower your chances of getting approved for a loan. Lenders can view this as “loan shopping”, which is not a good thing.
Lenders check your income to make sure that you’re able to make payments and avoid defaulting on a loan,. If your income is too low, or inconsistent, lenders might reconsider granting you a loan. If you’re self-employed make sure that you have at least 3 months of stable income before you apply. Learn more about applying for a personal loan without a payslip.
High debt-to-income ratio
Having a high debt-to-income ratio means that a high percentage of your income is going to paying the already existing debt. So your remaining income is too low to support another loan and more debt.
Loan purpose mismatch
Personal loans are the most flexible types of loans. While other loans like student loans or mortgages have a specific purpose. Make sure that you’re applying for a loan that matches the purpose that it will serve.
Understand what kind of loan you require
There are many types of loans available, with different purposes as stated before. Educate yourself on what type of loan you might need for your particular situation.
What are my next steps?
- Review your decline notice - Read through why your loan application has been rejected to inform you on what you can do next.
- Review your credit report - Access your credit report from one of the credit bureaus to see how your credit score might have been on the lower side.
- Boost your credit score - Improve your credit score.
- Get a co-signer - A cosigner will be able to help you get accepted for a loan that requires a higher credit score or a better credit history.
- Apply for a smaller loan amount - Try applying for a loan with better loan terms that you would have a chance of being accepted for.
- Wait to try again - The loan application process takes time and patience. Wait some time to make an application again with loan terms better suited to you.