Were you recently denied approval for a personal, home, auto, or business loan? As qualifying would have allowed you to purchase something you want or need, the news is disappointing. While this rejection could delay your plans, you can use it to improve your chances of getting approved in the near future. In most cases, financial institutions will provide you with details on why you were denied a loan. Below is a look at the most common.
You Have No Credit
Your credit history is an essential tool used by lenders to determine the risk of supplying you with funds. A report shows your debts, assets, and how well you manage your finances. If this is your first time applying for a loan or line of credit, chances are you don’t have much for them to review. No credit leaves too many unanswered questions. Unfortunately, many lenders don’t want to be the guinea pig.
If you were denied for having no credit history, you’d need to develop some. Applying for a credit card or store credit card is a great place to start. It can take six months to a year of proper use and regular payments to improve your credit status.
High Debt to Income Ratio
Everyone is juggling some amount of debt. Lenders want to know how well you manage yours. If you have more debt than income, this is a sign that you’re not financially responsible. It also signals that you cannot afford to pay the loan you’re requesting. Ideally, you should try to keep your debt to income ratio under thirty percent to appeal to lenders.
If you couldn’t get a loan because you had more debt than you could manage, there are ways to starting chopping it down. Creditors and service providers are often willing to remove late fees and penalties or reduce interest rates to make your debt more affordable. If that’s not enough, you can look into debt consolidation. Financial institutions provide eligible applicants with a loan at a low-interest rate that covers the cost of qualifying debts. This saves them a lot of money and gets debts paid off faster.
If you’re trying to apply for a long-term loan like a car or home loan, lenders consider your employment. They want to know that you not only have enough income to cover the monthly payments but that your job is secure. If your job history is filled with holes or you’ve only been at your current job for a few months, lenders usually don’t want to take the chance. Should you lose your job, it means you’re less inclined to pay your bills. Unfortunately, the only thing that can improve this is time. Try not to switch jobs for a while and reapply again in a few months to a year.
If, for some reason, you’re unable to repay your loan, lenders need an insurance policy. For large loans particularly, you may be asked to list your assets for collateral. While the asset is still yours, should you default on your loan, the lender can recoup some of their losses by collecting the collateral. If you don’t have any assets that can be used as collateral, you may need to shop around for another lender. There is also the option to increase your down payment amount, which reduces the financial institutions’ risks.
Whether short or long-term, lending money to an individual comes with risks. As such, lenders set up guidelines and safeguards to protect themselves against loss. If an applicant doesn’t check all the boxes, ultimately, they will avoid entering into an agreement. While this isn’t what you want to hear, knowing why you didn’t get approved is the first step towards getting the funds you need in the future to get that house, car, or business you’ve been waiting for.