It is a very disheartening feeling to have your loan application denied. Whether for a credit card, personal loan, auto loan, or even a home mortgage, it hurts to be denied. There are a lot of reasons you could be denied, and we'll help you prepare for the next loan application so there are no surprises.
Rocky credit score
Credit scores can be complicated beasts, but the reasons you could be denied for a loan are fairly simple. Missed payments or a history of not paying on time will lead to a loan application denial. If you have not paid something on time, every time, you are in danger of rejection.
Scour through your credit report to find any blemishes you may have had. If you are all caught up, then stay that way. If you are not caught up, get there as quickly as possible. The more smoothly your credit report reads, the more likely you will be approved.
How to correct: Spend time each month to make sure every bill is paid. Credit needs to be a priority if you are going to be applying for a loan in the future. It takes time to rebuild your history, so start making these payments a priority well in advance of any loan application.
Income too low
Your income may be holding you back. It's not always easily correctable, but if you make just enough to pay your living expenses lenders may see you as a risk. The extra money you have right now would be going to repaying your loan, and if you are not left with much, lenders see that.
A loan should not take a large portion of your disposable income.It depends on what the loan is for, but even a home loan payment should be about 28% of your total gross income. This means that if you are tight each month before the loan application that denial is probably coming.
How to correct: You may need to hustle. If you are confident in your current job role and see a future there, you may need to stick with it until the raises come. Otherwise, look for a second income, and have that extra cash flowing in for a while before applying for a loan.
Debt to income ratio
The debt to income ratio can catch a lot folks off guard. You have a few loans and credit cards already, and when you go for a new one, …denied. The debt to income ratio is the amount of outstanding debt payments versus the amount of income coming in.
If you have more than 40-50% of your income going to pay outstanding debt, you are not likely to get a new loan. This includes your home, auto, and any credit cards or personal loans. Lenders are looking for stability and they may judge that you are taking too much on at once.
How to correct: Make a concerted effort to pay off as much as you can before applying for new credit. To be absolutely safe, keep your outstanding debt payments below 30% of your income.
Time on the job
We get it. It's pretty easy to move jobs in a tight job market. However, lenders see this job hopping as an instability and might not lend to you. The time you put into your job is rewarded by raises and security.
Lenders know this, as well. They are looking for a stable, secure applicant that always pays their bills on time. If you keep starting new jobs it does not always look good.
How to correct: You may not love your current job, but you may need it to secure that loan. If you know you can improve your situation by changing jobs, then wait until after you have obtained that loan. You need at least 6 months on a job to be seen in a positive light by lenders.
Unstable living situation
The same rule that applies to your job can also apply to your living situation. If you have a habit of moving, often, you may be seen as having instability in your life. This does not apply to moving for a job that you already have.
Just like every item on our list, lenders are looking for stable applicants that are little to no risk for repaying a loan. If you are incurring the cost of moving often, you may not be that applicant.
How to correct: To all you free roamers out there, it may be difficult to hear, but you may need to put down roots. At least for a little while. The stronger your credit score, the less this will matter, but to strengthen it you may need time in one location.
Too much credit
Our credit card limits are teasingly high, and we want to use that available balance. Unfortunately, the more we do, the more likely we are to not be approved for new credit. The vicious cycle of debt can start if you get close to all your limits and then need credit again.
We want to make sure we keep our revolving credit card balances as low as possible, ideally paid off each month. The more you run those balances up, the more danger of denial for new credit.
How to correct: Keep Balances low, and only use the credit you need to. If you have the cash for an item, consider paying for it right away versus paying interest on it over time. Overall, keep away from your credit limit at all costs.