No matter how careful you are with your money, sometimes you need an unplanned expense to pop up. Maybe you planned and saved money to splurge on a vacation but a pipe burst in your home and thousands of dollars of damage were caused.
Then there are those whose credit score is 100% their fault. Was your loan denied? You aren’t alone, yet many are still unclear about the reasons for denied loans.
Many of the common reasons for denied loans are laid out in this guide. Keep reading to learn more.
Table of Contents
Low Credit Score
A low credit score reflects your past credit activity and is a gauge of your ability to pay back loans. Lenders are much more likely to deny a loan when the vehicle of repayment is not strong.
Banks take into account a variety of criteria when evaluating credit scores, such as hard inquiries, payment history, and debt-to-income ratio. Credit repair will help you recover from a low credit score and make loan approval easier.
High Debt-to-Income Ratio
When applying for a personal loan, one of the main deciding factors that a lender may consider is the borrower’s debt-to-income ratio. This ratio is calculated by taking the total amount of debt a borrower has and comparing it to the total amount of income that the borrower brings in.
Generally, a high debt-to-income ratio is seen as negative by lenders and may result in a personal loan application being denied. Since lenders want to ensure that the borrower can make payments on the loan, a high debt-to-income ratio could be seen as an indicator that the borrower’s income is not high enough to allow them to make payments.
Inconsistent Employment History
Lenders are looking for individuals who can demonstrate a level of financial stability, which an inconsistent employment history may not indicate.
The length of employment and job security weighs heavily in the decision-making process, as lenders want to be sure the loan repayment can be accomplished.
If someone had frequent job changes, the lender may determine that the individual is at a greater risk of financial instability, regardless of the job history showing a pattern of gaining better jobs with higher pay.
In such a case, lenders may not be assured they will get their money back, thus denying the loan. Thus, demonstrating consistent long-term employment is beneficial when attempting to acquire a personal loan.
Application Has Errors
When it comes to understanding why a personal loan was denied, it is important to consider that errors may have been made on the application. Errors can be as small as typos in the information or as severe as not listing all necessary documentation. Errors on an application are one of the most common reasons for loan rejection.
Any discrepancies found could indicate that the loan should not be extended. Errors on an application and any lack of accuracy or thoroughness of the application can all be grounds for a loan being denied.
The reasons why your loan may have been denied can vary greatly, but understanding those reasons can help you take better actions for the future.
If you feel your lender may have misjudged your financial profile, be sure to contact them and discuss your options. Don’t let being loan denied strangle your dreams; use it as inspiration to create a better financial path forward.
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