In an ideal world, the road to attaining additional funds when you require them would be smooth and easy to navigate. You’d simply have to find the loan you want, apply for it, get accepted and swiftly receive the financial support you need.
In reality, this process isn’t always this simple.
If you’ve been rejected or struggled to obtain a loan from traditional lenders, you’re not alone. Many individuals face challenges when applying for loans from traditional lenders for a variety of reasons.
However, understanding the reasons behind these struggles will help you improve your chances of success.
In this article, we’ll explore seven reasons why people struggle with loan approval from traditional lenders. From low credit scores to income stability, we will cover the various considerations that lenders evaluate during loan application assessment.
Let’s begin!
1) Low Credit Score
One of the biggest reasons for loan rejection is a low credit score. Your credit score is a measure of creditworthiness, and lenders use it to evaluate the risk of lending to you.
Credit scores act as a measurement of financial history. If you’ve kept on top of your finances, you’re likely to have a higher score. However, if you’ve defaulted on payments or have had a lot of debt, it could harm your score.
Lenders consider credit scores as a gauge of how reliable a person is regarding debt. For that reason, many traditional lenders check your credit score before approving your application. If you have a poor credit score, it may result in rejection.
Before making your loan application, review your credit score to determine how healthy it is. If you find there’s room for improvement, there are many fixes you can implement, such as settling debt, making payments on time, and avoiding too many credit inquiries.
If you’re not able to significantly increase your score, there are also other loan options available, such as a bad credit payday loan. These loans will evaluate your current financial situation instead of only focusing on your credit score when evaluating your application.
2) Failure To Meet the Lender’s Criteria
When you want to take out any type of loan, you need to meet the lender’s requirements. These requirements may include many factors, such as age, income, and credit history.
If you’re unable to meet your lender’s criteria, your loan application is likely to be rejected. For this reason, you need to carefully review the borrower’s eligibility to ensure you meet all the necessary criteria before you apply.
3) High Debt-to-Income Ratio
Debt-to-income (DTI) ratio is a measure of how your monthly debt payments compare to your monthly income. If you have a high DTI ratio, it suggests that you have existing debts and may not be able to take on additional debt.
If you want to improve your DTI ratio, pay down your debt or find ways to increase your income.
4) Unstable or Inconsistent Income
If you don’t have a stable job with a regular income or you have a low income, there is a higher chance that you might not get approved for a loan.
Lenders want to ensure you have a steady and reliable source of income so that you can repay your loan. If you have an unstable income or low income relative to the loan amount or are unemployed, it raises concerns about your ability to meet loan repayment obligations.
You can increase your chances of loan approval by finding ways to increase your income or demonstrating a stable employment history. For example, taking up a side job.
5) Too Many Recent Credit Applications
If you have applied for multiple credit options, it will show up in your credit history. This can make lenders nervous, as it implies that you’re desperate for credit and may be taking on more debt than you’re able to handle.
Every time you apply for credit, it will generate a search on your credit report and may temporarily lower your credit score.
If you want to improve your chances of receiving a loan from traditional lenders, avoid applying for credit unless it’s absolutely essential.
6) Insufficient Collateral
Collateral is any asset that your lender can seize if you default on the loan. Some lenders require collateral, such as a home or a car, to secure the loan. These types of loans are known as secured loans as the loan is secured on your collateral.
If you do not have enough collateral or the value of your collateral is insufficient to cover your loan amount, lenders may decline your application.
To improve your chances of approval, consider saving up for a deposit or looking for lenders who are interested in lending against items you have. You could also look for lenders offering unsecured loans.
7) Indications of Fraudulent Activity on Your Credit File
Lenders closely evaluate applications to identify any signs of falsified information, identity theft or attempts to deceive them. If a lender notices signs of fraudulent activity on your credit file or application, it can result in immediate rejection of your loan application.
To Sum Up
At times, getting a loan from traditional lenders can be a frustrating and challenging process. However, remember that there are always alternative options available.
Before you apply for a loan, carefully check your credit report and address any issues that you believe may be affecting your credit score.
By keeping the above points in mind, you can overcome the obstacles preventing you from receiving your loans and achieving your goals.