If you could think of three words to describe applying for a loan, the words “daunting,” “tedious,” and “taxing” may come to mind. After spending time getting the necessary documentation together and filling out your application, you need to seek approval.
Unfortunately, you have a 50-50 chance of a favourable or unfavourable outcome on a loan application. If you recently received a denial, you probably want to know the reasoning behind the decision. Here are five reasons for a loan application rejection.
Reasons Why Your Loan Application Was Rejected
1. Low Credit Score
When lenders view your loan application, one look at your credit score may provide a more precise picture of how good you are at managing money. Your score considers the types of credit you borrowed, your account’s age, and your payment history. A credit report may also show outstanding spending habits and temporary factor fluctuations.
2. High Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is a value that compares your monthly debt to your monthly income. A higher ratio suggests that the borrower will have a more challenging time paying back the loan to the lender. For example, if your total debt payments are $2,000 and you divide the value by your monthly income of $4,000, your calculated ratio would be 50%.
A ratio of 50% suggests a borrower would have a more difficult time paying off debt. This is why it’s best to keep DTI values at 35% or lower.
3. Insufficient Proof of Income
You’ll come across varying baseline requirements for different lenders and their loans. Depending on these factors, you may need to provide proof of six months’ worth of income. Not providing enough information may hurt your perceived ability to make payments on a loan. If your funds are insufficient for your loan request, a lender may reject your application.
4. You Don’t Meet Basic Criteria
Basic requirements for loans are similar among most lenders and may include the following:
- You must meet the minimum age requirement of 18 years.
- You must be a United States citizen or qualifying resident.
- You must have employment and own a valid bank account with funds.
5. Insufficient Information on Application
Believe it or not, some applicants forget to provide all necessary documentation or incorrectly fill out sections of their loan application. Remember to read over your forms to ensure that all spaces contain the correct information and supporting documents.
Once you’re aware of the reasons for your loan application rejection, you can take the appropriate steps to fix your errors and improve your chances of future approval. So don’t give up!