Loans are an integral part of the lives of many people nowadays. However, getting them is sometimes not so easy. Banks have a large list of criteria used to determine the reliability of the borrower.
However, even if you are an exceptionally conscientious client, you can still be denied a loan. And there can be many reasons, and this does not mean at all that something is simply wrong with you or your credit history. Let’s look at the most common reasons why banks refuse to issue loans.
Why do lenders refuse to give loans?
Bad credit history
The most common loan rejection reason is a bad credit history. A credit report is a document that contains detailed information about previously taken loans, their amount, payment terms, and applications to other banks. A credit reporting company generally can report most negative information for seven years.
Banks and other lenders are required to submit information about the obligations and payment discipline of their borrowers to at least one credit history bureau. It should be borne in mind that the consent of the borrower to transfer his data to the credit bureau is not required, so your data will be transferred in any case. In addition, information on the bankruptcy of individuals is transmitted to the credit bureau too, as well as court decisions on the collection of debts and alimony from the federal bailiff service.
With the help of credit bureaus, banks receive the necessary information about the integrity of potential customers: how disciplined previous loans were paid, whether there missed payments, etc. Moreover, even small delays in payment negatively affect the credit history.
However, there is a certain paradox: a client with a perfect credit history is not profitable for the bank from a financial point of view. The fact is that such a client has a great chance to repay the loan too quickly or ahead of schedule, which, of course, is not very profitable for banks.
If you do not have a credit history, then this can also be a reason for loan rejection. The fact is that it is rather difficult for banks to assess the reliability of the client. However, in this case, banks usually do not reject a request but give small loans on not the most beneficial terms.
Low salary, outstanding loans
Low income is also one of the main reasons for loan rejecti oons. Thus, lenders check the debt-to-income ratio (DTI) of a potential client. The debt-to-income ratio is the ratio of the amount of payments on all loans of the borrower to his average monthly income. It’s the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt. Lenders typically say the ideal front-end ratio should be no more than 28%, and the back-end ratio, including all expenses, should be 36% or lower.
If the DTI exceeds 50%, then lenders must form an additional capital reserve, which entails additional costs. It is worth noting that it is not so profitable for banks to give loans to borrowers with outstanding debts.
Thus, if you have open loans, it will be quite difficult to get approved, even if you make payments regularly. In this case, it is better to apply for refinancing.
Applying to several lenders at once
You can apply to several banks at once only in those cases when you are going to get a mortgage, a car loan or refinance a current loan. Otherwise, banks may take you for an unreliable borrower. This behavior of the borrower looks like this: the client is in a difficult financial situation and is not sure that he will be approved for a loan in one place, so he makes several applications at once. Or the borrower is going to cover another with one loan, which is not very popular with banks.
As a rule, such a situation arises when a potential borrower begins to send out multiple requests to banks and microfinance institutions. This is a big mistake: it is much better to send applications one by one.
Invalid information about yourself
Some borrowers are tempted to slightly correct their information in the hope that this will increase their chances of getting a loan. However, this is extremely dangerous: the bank will most likely notice the fraud and send this information to other banks. Thus, you can be blacklisted and lower your chances of getting a loan. Of course, there will be nothing for an accidental typo in the last name or date of birth, but in case of deliberate deception, severe sanctions will follow. As a rule, clients can deliberately overestimate their income, without confirming it in any way, indicating that they do not have active loans, etc. Of course, it is not difficult for banks to verify this information, so these kinds of frauds are detected very quickly.
For banks, this behavior means that a potential borrower does not believe that he or she will be approved for a loan, which means that the person has either some serious financial problems or problems with a credit history. This automatically puts such a borrower in the category of high-risk clients. Banks are afraid that such a client may miss payments, hide from the lender, try to deceive the bank, etc.
Tax debts, debs for housing, overdue utility bills
If a potential client has debts for housing and overdue utility bills, then there are no guarantees for banks that he or she can do the same with loans. Moreover, tax debts and overdue utility bills may result in debt collection by bailiffs. This can significantly worsen the financial situation of the borrower, who will then be unable to repay the loan.
Place of work
The place of work is also a very important factor in the approval of a bank loan application. And it’s not even about the income size or the prestige of work. There are professions with an increased risk category for the life of a potential borrower. Of course, this is not very fair, but banks are somewhat wary of issuing loans to representatives of these professions.
Also, the profession of the borrower may not be in demand in the labor market and in case of dismissal it may take quite a long time to find a job. Banks assess these risks and increase the interest rate for such clients, and sometimes refuse loans altogether.
Age of the borrower
As a rule, banks try to give loans to people of middle age, that is, to those aged 25 to 50 years old. At the same time, banks always look at the fact that the loan expiration date comes before the start of the borrower’s retirement age.
As a rule, the lack of higher education is not an important indicator when forming an opinion about the borrower, however, some banks consider it to be a certain criterion for decent social and financial well-being.
Frequent job changes
Frequent job changes scare off not only potential employers but also banks. Financial institutions believe that if the borrower cannot stay in one job for a long time, then the risk of financial difficulties is extremely high. As a rule, banks officially set the minimum length of time you should stay at your current job: six months. However, if you change jobs every year, this can seriously embarrass the bank.
Unemployed spouse and three or more young children
Yes, it sounds cynical, but if you have several small children and a non-working spouse, banks may begin to doubt that the client will be able to repay the loan on time since the financial burden is enormous. And if a loan is issued, then terms are not very beneficial – banks need to cover the risks.
Lack of any property
When issuing large loans, banks always pay attention to whether the borrower has any property: housing, a car, etc. This is checked in case of financial problems of the client – whether he will be able to sell something if they arise.
If a potential borrower was previously brought to criminal responsibility, had a criminal record, did not pay fines or alimony, then in this case the bank will most likely refuse loans since the risk of fraudulent actions by such clients is quite high.
Too high or too small loan amount
If you request a too large loan, the bank will doubt whether the client will be able to return it. At the same time, if you request too little, you may get the impression that you have extremely serious financial difficulties.
If you apply for a loan offline, bank employees pay attention to your appearance and speech. Financial consultants evaluate the appearance and behavior of a potential borrower according to the special regulations of the bank. If there are any alarming signs, the borrower is likely to get rejected for a loan.
So, a huge number of factors influence the decision of banks on whether to give you a loan or not.
Was your loan denied? Here’s what to do
- Check your credit score. It is recommended to contact the credit bureau and get a detailed extract. So you will know exactly what is preventing you from taking a loan. Perhaps you have a debt that you are not aware of – for example, an outstanding overdraft on a bank card.
- The lender may refuse to give you a loan if you already have open loans (including mortgages), even if you are making payments regularly. Then it is better to pay off existing debts, and then take new loans.
- If the problem is an incorrectly completed application – wait one or two days and try filling out the form again. Please check the information you provided in the application several times before submitting.
- You may also not meet the company’s requirements for borrowers. Usually. you must be at least 18 years old, be a US citizen or permanent resident, and have a stable income. Here it will be easier to choose another company that is not so demanding on its customers.
- You may be blacklisted by the lender if you have previously tried to take a loan by fraud – for example, you forged documents for this. Also, a scammer could steal your information in order to get money with its help. If you are sure that you have been blacklisted due to a misunderstanding, then discuss this issue with the company’s support service.
In any case, we also advise you to contact a company that does not have strict borrower requirements and approves almost all applications. For example, you can use a loan referral service that finds the right lender for your needs. Loan approval rates are very high. The system approves a loan even if you have a bad credit score. The process can be completed online.
Need money urgently? 5 ways to get instant cash
1. Contact a microfinance institution
Microfinance institutions are more loyal to their clients than banks. They also check credit history, but are more tolerant of delinquencies. You can get an online payday loan from a microfinance institution without providing proof of income. Most applications for payday loans are approved (up to 95%). The borrowed funds can be used for whatever purpose. Microfinance institutions transfer data to credit bureaus. Therefore, this is a good chance to improve your credit history.
Microfinance institutions offer not only quick payday loans but also mid-term personal loans and long-term secured loans. Small and medium-sized businesses can also use their services.
So, if the loan is not approved by the bank, you can take it from a microfinance company:
- A payday loan is the best solution for short-term financial difficulties. Such a loan can be obtained very quickly. This can be done online on the company’s website. Funds are typically transferred to the borrower’s bank account as soon as the same day. The loan amount and duration are small. As a rule, you can borrow up to $2,500 for up to 31 days. This allows you solve your financial problems without getting into debt. But you need to know how to manage your payday loans properly.
- Personal loan. This service is provided by major financial institutions. The average lending terms are 3-6 months, the loan amount may reach $5,000. Repayment is made according to the schedule. Collateral is not required, but the borrower must have a stable income that allows him or her to service the loan without any problems.
- Secured loan. If you need a large loan, then you can apply for a secured loan. If the loan is secured by collateral, this significantly reduces the risks of the lender, and an interest rate can be reduced. Vehicles, housing, special equipment, jewelry and other valuables can serve as collateral. Individuals usually take large sums for buying a new car or other large expensive purchases. Entrepreneurs can use the money to expand their business, purchase equipment, and other similar purposes. The loan amount can be up to 80% of the value of the collateral. In any case, the approach is individual.
2. Search for a bank with the lowest loan rejection rate
It is worth getting a credit card. For such services, rejections are less common. In essence, this is a line of credit that you can use from time to time, repay and borrow again within the established limit. A credit card will always allow you to borrow money within a certain limit. Credit cards are issued very quickly, for this you do not even need to go to the bank. But there are also some problems:
- credit cards are suited for cashless purchases. Commissions are charged for cash withdrawal;
- there is a fee for servicing a credit card. Annual fees typically range from $95 to upwards of $500;
- if a certain bank refused you a loan, then most likely it will not be possible to issue a credit card in this bank. But you can try to get a credit card with a very small limit.
3. Go to a pawnshop
Here you can get funds secured by any valuable property. You can pledge a car, expensive equipment, jewelry. In a pawnshop, clients rarely get rejected.
But there are some downsides:
- if you do not return the money, you lose the item forever;
- high interest rates;
- the value of the pledged property is much lower than the market value;
- short term loan duration.
4. Use crowdlending
Crowdlending is a fairly new concept today. This is a special form of issuing a loan, and both legal entities and individuals can borrow money. It’s like a personal loan. As a rule, a deposit is not required. Lending is organized with the help of intermediaries, special Internet platforms. They use their own methods of analysis of the borrower. The loan terms and conditions depend on the rating of the borrower. Large loans are provided gradually in installments from several lenders: a kind of collective financing. Companies may be required to pay income tax.
5. Contact a credit repair company
In the most severe situations, if banks and microfinance institutions refuse to give you a loan, you can contact a credit repair company. This service is for those who want to improve their credit score.
Even if you are in a desperate situation and you need money urgently, we advise you to avoid private loan companies operating without a license. This is fraught with predatory interest and financial fraud at your expense.
Where can you get a loan if banks do not approve your requests? There are many options, but almost all of them allow you to get a small amount for a short time. The most acceptable alternative to a bank loan is a payday loan from a microfinance institution. Financial companies offer various ways to solve your financial problem. You can choose the service that suits your situation. To borrow money, there is no need to do paperwork or proide collateral. Sometimes you just need one document to prove your identity. This is a quick and easy way to deal with short-term money difficulties. Each company has multiple offers for various categories of borrowers, so you can certainly find the right option. The most important thing is to spend the borrowed funds efficiently and repay your loan on time.