5 most common loan denial reasons
Applying for a loan requires some planning and research. One in four loan applications is rejected due to poor planning.
Before you apply for a loan, you need to understand your loan options. It's important to choose the right type of loan and to have all your documentation in order.
You also need to understand the most common loan denial reasons. This will help you make sure you avoid these common pitfalls and increase your chances of approval. There are five common issues to watch out for.
What's Involved in Personal Loan Applications?
If you're applying for a loan, you'll have to provide information about what you need the loan for. You'll also need to provide information about your financial situation.
Depending on the type of loan application, and your situation, you'll need to provide personal and business financial statements. You'll also need to provide two years worth of tax statements.
The loan application requires you to prove your ability to pay back the debt. This means your application will also require a credit check. This shows your past and current debt situation so a lender can determine their risk.
Many applications require a criminal background check too. You'll need to authorize the lender to check all this information. You'll also need to provide proof of all statements made on the application.
If there are problems with any of the application information or supporting documentation, you'll find it difficult to get approved.
Common Loan Denial Reasons
83 million people applied for loans in the past year. With so many applications to check, lenders need to make sure they reduce their risks. Most lenders avoid approving loans that are not likely to get paid back.
Lenders use the information you provide to determine how well you can pay them back. They also depend on outside reporting systems to determine you've provided full information. It's important to make sure all your information is in order and correct.
1. Reasons for a Personal Loan
There are different types of loans that cover different types of expenses. When you apply for a loan, you're required to provide details about how you expect to use the money. This makes it important to research your loan options before applying.
Check each lenders loan policies to make sure the loan will cover your needs. Some loans will not cover school expenses or business expenses. There are also different types of loans for large purchases.
Make sure you apply for a loan that covers the expense you have. For example, if you require money for a business, you'll want to look into self employed loans.
2. Issues with Your Credit Report and Score
Before you apply for a loan, you need to check your credit report. There are different reports available, so you want to check all the reports.
Most lenders require a good credit score to approve your loan. A good score differs between reports, but this number starts at 670-700. Your current score will depend on the information provided on the credit report.
Make sure all information on your report is correct and updated. Look for issues where paid debts still show up on the report or where the report has incorrect debt info. If you find any issues, contact the reporting agency to find out how to fix your information.
3. Too Many Open Debts
When you apply for a loan, the lender will look into all your open debt. This includes student loans, business loans, and current payments on large purchases. Lenders also look at the assets you have available to cover your debt.
They use a debt ratio formula to determine the risk of lending you money. A high debt ratio means you run the risk of more debt than assets to cover the debt. High debt ratio increases your chance of rejection.
Make sure you pay down outstanding debt before you apply for a new loan. This includes making sure all debt is up-to-date. If you have delinquent debt you're considered high risk.
4. Issues with Your Income
Income is your biggest asset towards covering your debt. You need to prove you have a steady income, and enough to cover your current expenses and new debt.
You'll need to show bank statements and pay stubs to prove your income can stand up to the debt. Many lenders have a minimum income required to approve a loan, so you need to research their income requirements.
This gets trickier if you're self-employed too. You will need to prove your business will withstand to pay that debt. You'll also need to figure out what financial statements will work to prove your income as a self-employed individual.
5. Missing or Incorrect Info on Your Application
No matter what your employment situation, you'll need to make sure you have the needed documentation to prove the information on your application. You need to research each lender's requirements for all supporting documentation so you can have everything in order.
You also need to check your application carefully to make sure you complete all required information. Make sure everything is completed with good supporting documentation. Also, make sure all the information is correct.
If there is any discrepancy with what you report, your application will get denied. Check your application statements against your documentation to make sure it matches. Double-check the information you provide to make sure you don't leave anything out.
Finding the Right Lender
Choosing the wrong lender will also decrease your chances of loan approval. You need to research your options to find a lender willing to work with you.
There are many lender options. You can apply with a bank, a loan office, or an online lender. Each type of lender will have different requirements to apply.
There are many options to find the best lender. You can research lenders on your own, or use a lending marketplace to research multiple options at once. Make sure you look at all the fine print when applying.
Understand Your Financing Options
Knowing the common loan denial reasons will help you increase your chances of loan approval. A loan isn't your only financing option though.
It's important to research all your options before you apply for anything. Check out more financing tips to find the best choice for your needs.
