When you apply for a loan, you’re actually asking a financial institution to trust you to pay an amount of money back within a specified period and to make those payments on time every month. To determine whether to extend this trust to you, various factors are taken into account by looking into your financial behavior and habits.
Here are some reasons why your loan request may have been turned down.
A poor credit report can derail your hopes for a loan. It may be deserved due to poor financial habits. However, in some cases it may simply contain correctible errors such as:
- Charges for something you didn’t buy
- A calculation error
- A payment or credit not noted on the report
(You can get a free copy of your credit report from any of the three major credit reporting agencies: Experian, Equifax, and TransUnion)
Lenders don’t like sketchy credit histories. Not only do they check out credit card and loan repayments, they’ll look into how you pay your telephone bills and insurance premiums. If you’ve experienced a bankruptcy or foreclosure it has a negative effect. It also doesn’t help to have all of your accounts maxed out.
Lenders don’t like short or ‘thin’ credit histories either. If you’re young and haven’t built up a credit history yet, or if you’re one of those people who prefer to pay cash for everything, you don’t have enough of a financial track record to be judged ‘loan worthy’.
Your income to debt ratio is a key factor. If you already have a couple of loans and some credit card payments, you’ll be judged on how much you make, minus those monthly payments. If they don’t think you can handle one more payment, you won’t get the loan.
Too many outstanding loans can hurt you. In fact, if you open more than 21 loan accounts in your lifetime, you become increasingly penalized - and that includes credit cards. Those cards may be a tempting way to access quick cash, but limit yourself to between 15 and 20.
You’ve recently been rejected at several other financial institutions. Don’t go to a lot of places at the same time hoping one will come through with a loan. Every time your application is rejected it’s noted in your record. The first time you’re rejected, find out what the problems are, and take the time to correct them before trying again.
In fact, several credit inquiries in a six month period can be deadly - with nine or more, you’re automatically denied. If you’re refinancing your home, your lender may access your report several times coming up to closing. Add to that a couple credit card applications and you may hit nine without even knowing it! Even as few as four credit inquiries in six months can harm your rate.
Not enough money in the bank or in investments can hurt your chances for a real estate loan. You need enough money for a down payment, additional transaction charges and remaining funds to cover your payment for several months. Also, you’ll be rejected if you apply for a loan higher than 95-percent of the appraised value of the property.
Your job history is important. Financial institutions don’t like to lend money to people who’ve been in a job less than a year or are still on probation for a job – or if you’ve held several jobs over the past few years. Most lenders prefer two years of steady employment.
Many address changes also count against you. If you’ve moved around a lot over the past two years the financial institutions see it as instability.
If you co-signed on a loan for someone else who didn’t pay it off, you’re responsible for that loan. If you didn’t pay, it affects your credit rating.
If you co-apply for a loan with someone with a poor credit record it works against you. Both loan applicants need to have a good record to be considered in a positive light.
As you’ve seen, there are several reasons that a loan may be denied. However, while it may feel bad, it’s also an opportunity. Lenders must give you the reasons for your denial so you get the information you need to improve the poor or damaged areas of your financial life. Whether it be cleaning up your credit history, building up your bank account and investments, or biding your time until your job history reaches a stable two years, you’ll be primed for success the next time you apply!