Most Common Reasons Why Your Loan Application Could be Rejected

If you’re applying for a loan, it’s important to understand your options. Not only do you have to consider your current financial goals, but you have to be realistic about your outlook. Though it doesn’t feel good, loan rejections do happen. However, that doesn’t mean you have to take a rejection personally.

When you understand the most common reasons why your loan application could be rejected, it’s a lot easier to take steps in the right direction. The more you know about the loan process, the better your chances of an accepted application. Loans can be used for a number of things, from financing a home to paying down debt. In this guide, we’ll explore the reasons why your loan application could be rejected if you’re not careful (and what you can do about it).

Your Debt to Income Ratio Is Too High

First, one of the most common reasons your loan application might be rejected is because of your debt to income ratio. This is a ratio that compares your monthly gross income to your monthly debt payments. If you’re paying significantly more in debt payments, for example, than you make in income each month, this is a red flag for lenders.

Most lenders want to see a lower debt to income ratio. This indicates that you’re in control of your debt, and you’re a reliable candidate for new debt. The recommended ratio is 35% or less. The lower your ratio of debt to income, the more likely your loan application will be approved.

What to do: If you’re facing a problem with your current debt to income ratio, the first thing to do is to take inventory of your debt. Once you know how much you owe, consider ways to increase your payoff or consolidate to lower your overall debt. This can take some time, but it’s a huge step in the right financial direction.

You Have a Low Credit Score

While it’s true there are some low-credit loans available, most lenders have rigid expectations when it comes to your credit rating. Your score, along with factors like your income and your debt, suggests whether or not you will be able to afford a new line of credit.

Because your credit score reflects your payment history, amount of debt, and types of debt, it’s usually a fair reflection of your current financial status. If you do get approved for a loan with lower credit, you’ll likely face a larger interest rate to compensate for the higher risk.

What to do: Luckily, it’s possible to improve your credit score no matter where you’re currently at. By lowering your overall debt, making regular payments, and showing lenders you’re reliable, your credit score improves naturally.

You Borrowed Too Much

Did you know it’s also possible to be denied a loan because you asked for too much? As the saying goes, there is such a thing as ‘too much’ of a good thing. If you’re trying to borrow more than a bank thinks you can afford to pay, you’ll be denied.

The amount you are approved for is based on your income, expenses, and other debts. If you’re trying to take out a large loan without enough income to account for repayment, this doesn’t look good to lenders. They might offer a lower amount or deny your loan application altogether.

This can also be true if your income isn’t stable. If you don’t make enough for the amount you want to borrow or your income changes monthly, you’re more likely to have your loan application rejected.

What to do: Be realistic about how much you can afford to repay. You should never take on more debt than you can afford. If you’re unable to get approved for a certain amount, you might need to consider other financial options.

Your Loan Didn’t Qualify

Last but not least, you and your loan also need to qualify for approval. This usually means being a resident of Australia, being above a certain age (18), and being employed. Additionally, you can’t take out a loan for any purpose. For example, you can’t use a personal loan to invest money in most cases or to gamble.

This is why it’s essential to understand your lender’s specific rules and qualifications before you apply. You can improve your chances of getting your loan application approved by understanding your options.

What to do: Always read the loan’s qualifications carefully to make sure you meet the criteria.

Boost Your Loan Application Chances

By learning the most common reasons loans are denied, you can discover ways to improve your chances during the application process. From building your credit rating to lowering your debt, each of these steps makes you a stronger candidate in the eyes of lenders.

Need help planning your next financial move? The team at Debt Busters are here for you. By working with a member of your team, we’ll identify the best path towards financial freedom. Call us today on 1300 368 322.

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