Unexpected emergencies are part and parcel of human lives. When there is an emergency and you don’t have enough funds in your savings, you go for a personal loan. You can apply for personal loans for any urgent need other than speculative purposes.
People typically have the wrong idea that it is easy to get a personal loan. Sadly, it is not. Lenders have specific terms and conditions for dispersing personal loans. You have to meet every single one of them before you could get approved for a loan.
When you apply for a loan, lenders verify a lot of details such as credit score, debt-to-income ratio, outstanding debt, other credit activity, and more. Even a small error in any one of the areas will lead to an outright rejection of your loan application.
If you are wondering about the different factors that could influence your loan application, this article is just for you. Let’s get started right away with the most obvious reason of all.
Related Article: 7 Most Common Financial Mistakes.
1. Your Credit Score Is Too Low
Your credit score signals how creditworthy you are to a lender. It is for this reason that every lender checks your credit score once you apply for a loan. A good credit score indicates that you are in a stable financial position, and there is minimal threat of default on a loan.
This is why people with good credit scores have high approval for all kinds of loans, including personal loans. If your credit score is lower than 550, there is a good chance that it might be rejected by most lenders.
Solution: Before you apply for a personal loan, you need to build your credit score first. This starts with getting a copy of your credit report and looking for ways to improve them.
2. You’ve Requested Too Much Loan
Even if you have a good credit score, requesting an outrageous amount that is impossible for you to pay will lead to an outright rejection of your application. Lenders will assess your financial situation and your capability to pay your loan before they give out a loan. This check will focus on your monthly income, outstanding debt, and other expenses.
If your monthly income is $5,000 and the loan applied is $100,000, the lender will hesitate to approve your loan because the sum requested by you is way more than your repaying capacity.
Solution: Use a loan installment calculator to figure out how much you must pay every month in installments. Make sure you apply for a realistic amount that is within your means.
3. You Have Heavy Outstanding Debt
Sometimes, people apply for a loan to close an existing one or to cut the burden of having heavy debt. However, never forget that lenders will scrutinize your credit reports. From your credit reports, lenders can know how much outstanding debt you have. This could be a problem for them as they have to worry about your ability to pay back.
Typically, a low debt-to-income ratio of less than 35% is a good indicator of healthy credit. For instance, you pay $1000 for your auto loan, $1600 for your mortgage, and another $500 for your other debts. The total comes to $3,100. If you have a monthly income of $5,000, your debt-to-income ratio is 62%. This is way too risky for a lender to provide a personal loan for such an applicant, and it will get rejected.
Solution: The best solution here is to look for ways to improve your income and pay down your debt. You could try the snowball method of repayment, which basically involves paying off your smallest debt first and then moving on to the next in a series. Also remember, do not apply for any new loans till you repay the existing ones and become free of debt.
4. You Have an Unstable Job and/or Low Income
Job and income play a vital role in the approval of your personal loan. Lenders review your job credibility and income to know if you will be able to pay your credit and loan on time.
Some of the criteria considered before issuing a loan include:
- The borrower must be with an organization, company, or institution at least for a year.
- The borrower must be monthly salaried.
- Changing your job frequently will affect your chances of getting a personal loan.
- Fluctuation in your pay scale due to a change in job will make the lender turn down your application.
Solution: Don’t apply for a loan till you get employed in a stable job. If you already have a stable job, you can boost your income by accessing extra working hours or doing some side hustles.
5. Your Application is Incorrect
The credibility of the applicant is only as good as the details in the application. When the application is riddled with errors, it doesn’t exactly signal trust to a potential lender. Willful tampering of income and job details are big red flags for a lender. So, never put yourself in such situations.
Also, missing out on important details is another major issue in loan applications. Forgetting to submit your salary certificate, identity card, or entering incorrect account details will lead to instant rejection of your application.
Solution: Cross-check your details before processing your application. It is always good to keep all your paperwork handy even if don’t need some of them.
6. You Have Errors in Your Credit Report
This happens more commonly than you think. Errors in a credit report, even if it is not your fault, will affect your ability to get a loan. Some of the errors like double entries of the debt, wrong balancing of accounts, not updated loan payments, etc., will severely impact your loan chances.
Solution: This can be avoided if you keep track of your credit score periodically. It will help you stay on top of any unforeseen errors in your report. Most importantly, it will help you alert the credit rating bureaus instantly and ask them to fix the error.
Always get a good understanding of the loan process before you apply for one. It would help you in the easy processing of loans. Before submitting your loan application, analyze your credit report and credit scores without fail.
Lenders will have a cut-off for the income that might vary from one lender to another. Do not feel embarrassed about your loan denial instead try working on the above areas to get it approved.
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