The 5 Most Common Reasons Someone Is Denied A Loan [Video]

Here Are 5 Frequent Causes For Loan Rejection

Having a loan application denied can feel like the end of the world. Especially if you needed the money fast or for something really important. But the reasons why you may have been rejected are actually pretty common. And the good news is that lenders are required to tell you specifically why in what is called an adverse action notice. Carefully read yours to find out why you were denied and make steps to correct the problem.

The odds are good that it will fall under one of these categories. Read on for more detailed explanations that may help you get approved for a new loan application later. The best practice for reapplying is to wait at least a month and preferably six months before applying for another loan, particularly with the same lender or for the same loan. If you have taken steps to improve the problems that caused the rejection, you increase your chances for approval.

1. Missing Or Incomplete Information On the Application

Something as simple as not having completely filled out all of the required forms can cause your loan to get rejected. You can easily remedy this, however. But note that completely and accurately filling out any required paperwork remains very important. If you don’t take your time when applying for a loan, it may make you seem irresponsible to the lender. Typically, companies don’t like loaning out money to irresponsible borrowers. So do your best to not look like one of those and ensure accuracy in all of your information. And make sure to complete all required forms and any additional information or documentation as requested by the lender.

Following these steps can help you look better when applying for loans and improve your odds of being approved. Double-check that you have all the required documents and forms. Then ensure that you have filled them out completely and correctly. That increases your odds of being approved, as most lenders are looking for a reason to deny credit and a sloppy application is a big one.

2. Poor Or No Credit History

Your credit score is another big factor in whether a loan will be approved. If your score is low, due either to bad or no credit history, then approval will be less likely. The two main credit scores are FICO and Vantage. They have similar ranges from 300 to 850, based on the most commonly used ones. And both have around the same numbers that are considered good and bad for your credit, with around 670 and up considered good for both scores.

If your score is below that, the chances of being denied credit are higher. Unfortunately, barring some kind of mistake in your credit score, there is no quick fix. Which is why you should check your credit report every year. You are entitled to a free report from each credit bureau every year. If you find a mistake, you should dispute them in writing to the credit bureau that reported it.

3. Denied a Loan for Carrying Too Much Debt

A big factor in loan applications is what is called the debt-to-income ratio, or DTI, as it will often be called. This is how much debt you have compared to your income, if that wasn’t obvious. It equals all your monthly debt payments divided by your gross monthly income, presented in a percentage. A good DTI is about 30% or less. If your debt payments account for more than a third of your monthly income, you look less financially stable to lenders. That makes them less likely to take on the risk of lending to you.

The easiest way to fix this issue is by either lowering your debts or increasing your income. Far easier said than done, I know. But before trying to take on new debt, do what you can to decrease the old or find a way to increase how much you make. You can either ask for a raise, find a higher-paying job, or do various side hustles to make extra cash. We have a great list of ways to make easy money on the side here, if you need ideas and inspiration. Shameless plug, I know, but it does list good ways to earn more money.

4. Denied a Loan for Low Income

This relates to the earlier reason but is slightly different. Even if your debt-to-income is good, you may not make enough money to justify the loan you are requesting. This is due to what is commonly called “qualifying income.” Unreported cash earned as well as many bonuses don’t count towards your income for lending purposes. This makes it especially difficult for self-employed people to get loans. They typically have to work much harder to show their income.

If your income falls below the lender’s requirements, make sure you include any additional income sources with documentation. This includes any side hustles, income from investments, or even court-ordered payments like child support. So be sure to show that income to lenders if you have been rejected for low income. If you are self-employed, getting as much documentation of your income as possible will help prove to lenders that you are making as much as you claim. That increases the likelihood that you will be approved in the future.

5. Denied a Loan for Too Much Job Instability

Even with enough income, a good credit score, and a low DTI, you can still not qualify if have an unstable employment history. Recently changing jobs or frequent job hopping can make you look less reliable in the long term to lenders. They want to know that your income is stable so that your repayments will be reliable. If it looks like you are constantly changing or losing jobs, then it is more likely that you will default on the loan.

Generally, a recent job change counts as anything in the past two months, or 60 days. The best way to improve this issue is to keep any jobs for longer. Of course, that may not be within your power but if you can stick out a job for longer and make sure you stay with employers, that will help in the long run. Loan application approval rating lower on the list of benefits there, obviously. But that factor could help with future loan offers.

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