06 May Why You Got Rejected for a Loan
Being denied a loan can be truly frustrating. You’ve submitted seemingly endless paperwork to get a big fat rejection letter. But why? Usually, it’s because your credit score is too low, although various other caveats may have played a role in your rejection. These could be a sky-high debt-to-income ratio, a high credit utilisation ratio, unstable income, and other reasons we’ll explore throughout this post.
Read on for everything you should know about why you got rejected for a loan and what to do next.
In short, possible reasons for rejection might be:
- Bad or no credit history
- Too many hard enquiries
- Inconsistent or low-income
- Your debt-to-income ratio is too high
- You’re trying to borrow too much money
- Too much existing available credit
- Unstable residence history
Let’s dig deeper…
Bad Credit
Credit is the single most important thing lenders look for when going through loan applications. If you have no or bad credit, you’re quite unlikely to get approved for a loan, personal or otherwise.
To combat this, try onboarding a co-signer with a better credit history than you. This way, lenders feel more assured about lending you money because another person is liable for your default alongside them. Should you not pay, someone has to– namely your co-signer. If you can’t get anyone to co-sign for you, try building your credit. This is the long way around, but it’s a great investment in the long run. You’ll get better loan terms, better rental agreements, and more favourable insurance premiums.
Too Many Hard Enquiries
A hard enquiry is when a creditor performs a credit check to assess whether you’re a viable loan candidate. If there are too many of these on your credit report, lenders might think you’re trying to take out too much credit, indicating you’re a potential high risk. Hard enquiries are made by insurance companies, credit bureaus, and credit providers. Instead of blindly applying for credit and earning a hard enquiry, try performing a soft enquiry instead.
Soft enquiries are credit checks done by credit bureaus like Experion and Transunion. They don’t affect your credit score, and you can get a better-rounded view of the state of your credit before applying for a loan. This way, you have a higher chance of approval.
Debt-to-Income Ratio Too High
DTI, or debt-to-income ratio, is a score that tells lenders and financial institutions how creditworthy you are. It does this by quantifying how much debt you are yet to repay compared to how much you make grossly. A good debt-to-income ratio is about 35%.
Too Much Existing Available Credit
If you have high balances of outstanding credit, you’re unlikely to get approved for a loan because lenders will assume you won’t pay them back, either. Repay your other balances first, then apply for new credit.
Instability
If you’ve moved around a lot over the years, creditors may think you have an unsustainable way of life or that you couldn’t keep up with rent payments. An unstable employment history could also affect your credit score. Lenders like to see you’re stable, as instability influences spending patterns.
In essence, you were probably rejected for a loan because of bad credit or an indication of instability or unsustainable spending habits. If you’re over-indebted and need help getting back control of your finances, contact Debt Refinance. Our debt counsellors have over 15 years of experience helping people regain financial health.