Typically, most people looking for loans spend a lot of time and effort improving their credit scores. This is a wise decision, as your credit score is crucial for your loan eligibility. However, while having a high credit score can get you loans with better terms, it’s just one of the many thresholds.
As a result, you want to consider more factors before applying for a loan. However, these factors may vary depending on the type of loan product and the lender.
This article outlines the most common reasons your loan could be declined. It also provides practical tips for improving your loan eligibility.
1. Bad Credit Score
While reviewing your loan request, lenders will look into your VantageScore or FICO credit score and other variables. A credit score is influenced by debt payment records and the amount due. The lenders are more strict on unsecured personal loans. They use your credit score to predict your ability to manage your debt obligations.
Most lenders make their minimal credit standards public, while some don’t. To avoid disappointment, ensure you understand a lender’s credit score requirements before applying for a loan. Fortunately, lenders will give you a loan even if you have a poor credit score, but you’ll be charged a higher interest rate to cover the chances of a debt default.
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2. High Debt-to-Income Ratio
Another common reason most loan applications get rejected is a high debt-to-income (DTI) ratio. This ratio is expressed by comparing your monthly debt to your gross monthly earnings. For instance, if you’re making a monthly debt repayment of $2,000 and your monthly income is $4,000, your DTI ratio will be 50%. Such a high percentage would indicate that you would likely find it hard to repay more debts.
As a result, you’re advised to strive for a lower DTI ratio; a DTI ratio of 35% or below is healthy. You’d have a better chance of getting a loan this way.
3. Applying for More than You Qualify For
There are various determinants of loan eligibility. These include your employment status, income, and credit history. A lender may decline your loan application if your earnings aren’t enough to cover the amount you are applying for.
For example, if you apply for a loan of $90,000 and you don’t have a sufficient or stable income for monthly repayments, your request is likely to be denied.
4. Unstable Or Insufficient Income
Besides looking at your DTI ratio and credit score, lenders will also evaluate your income to confirm if you can repay the loan. If they think your earnings aren’t enough to cover the amount you’re applying for, or if it’s unreliable and changes rapidly, the lender will decline your loan request. Essentially, lenders want to ensure that borrowers pay their bills and have enough cash to repay the loan on time.
5. Missing or Bias Information in Your Application
A lender will readily decline a loan application lacking crucial details or the required supporting documents. Also, loan forms completed with incorrect information will be automatically rejected; worse yet, they may completely ban the applicant from seeking their loans in the future. As a result, go through your filled form, ensuring your answers are accurate and you’ve uploaded the necessary documents. Additionally, you can call their representatives for clarification if needed.
6. Wrong Intended Use of the Loan
While most lenders allow their clients to use their loans to pay for almost everything, there are a few rules you must observe. For instance, most lenders warn their customers against using personal loans to pay college tuition fees. Also, they don’t allow borrowers to use loans for gambling or illegal trades.
How to Boost Your Chances of Getting a Loan
After determining why your loan application was declined, strive to boost your chances on your next application. Here are a few ideas that might help:
- Improve your credit score.
- Boost your earnings.
- Pay off your debts.
- Go for more realistic loan products.
- Look for a cosigner.
- Commit collateral.
- Research the requirements and surpass them before applying.
Tough times come and go, and the best feeling is knowing you can get help. We often turn to friends and family, but they may be facing hard times. You need to seek help from financial institutions. So, while preparing for financial emergencies, follow the above tips to improve your loan eligibility.