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5 Common Reasons Loans Get Rejected

A fairly large proportion of loans get rejected outright, and a similar number are delayed due to concerns that there are issues with the applicant or the application itself. Here are five common reasons why loans get denied. Learn from this list so that your own loan isn’t rejected unnecessarily.

5 Common Reasons Loans Get Rejected

Poor Creditworthiness When Checked

Creditworthiness is a measure of how qualified you are to repay the loan. Lenders tend to use fast metrics like your credit score. If your credit score is too low, your loan application will probably be rejected by traditional lenders. If you are self-employed and thus officially have poor credit or have been rebuilding your finances after a financial crunch, you should work with a lender that does manual underwriting. Another alternative is seeking a creditworthy co-signer so that your own credit doesn’t matter as much.

You are likely to be rejected if you have a history of missed payments or a recent bankruptcy. Some lenders will even penalize you if you live in a home where someone else has defaulted on loans, whether family members or a partner. Know that if your co-signer has defaulted on other loans, your application listing them as a co-signer is likely to be rejected.

Mistakes, Lies and Inflated Stats, Oh, My

Lenders will reject applications if you outright lie. If you lie about your income, assets or current debts, they will reject your application. One alternative to this is applying for loans with lenders that don’t verify your income or assets, though they charge a higher interest rate for this privilege.

If you lie on a credit application by inventing a co-signer or applying for a credit card in a child’s name, you’re at risk of criminal charges for fraud and will have any future credit applications declined.

You also risk rejection when you submit loan applications that are riddled with mistakes. If you’re making spelling and maths mistakes on the loan, they will wonder if you’re really competent to manage your money and repay your debts. They’ll also wonder if the different values you put down for monthly pay and annual income are honest mistakes or an attempt to get approved based on the higher value. This means accuracy and honesty are essential, even when applying for a quick loan.

Lack of Cash Flow

Lenders routinely reject loans when they think you are not able to repay it, credit score notwithstanding. One solution is to seek a loan with lower payments over a long term, while another option is to apply for a loan with collateral so that the payments won’t be as high. A third option is waiting longer before you take out the loan, paying off smaller loans to free up cash flow or saving up cash so that you don’t need to borrow as much. Debt consolidation into a single lower overall loan payment helps free up cash flow, though lenders may still reject your loan if your debt-to-income ratio is too high.

Limited Collateral

Lenders are prone to rejecting applications from those mortgaged to the hilt, such that everything you already own of value is already mortgaged. This is especially true of loans that are secured by property; they don’t want to lend you money against property that another creditor already has a claim against.

Lenders may see you making regular payments and having good credit, but you have nothing left to sell or mortgage if you have a dip in your income. Do not inflate the value of your assets to try to offset this restriction or else the loan will be rejected. If you lie about your home or vehicle’s value in an effort to get a new loan against it, the lender can prosecute you for fraud, especially if you default on the loan.

 

Your Reasons for Seeking the Loan Are Shaky

Lenders may see that you have the cash flow to take out the loan and can repay it but refuse because the reasoning behind the loan seems untrustworthy. For example, startup businesses that lack a good business plan for their expansion will likely be rejected. If you try to borrow money to buy a home or vehicle to get to work, lenders are likely to approve it because you will move heaven and earth to avoid repossession. Conversely, if you are seeking to borrow money to go on vacation, lenders are reluctant to lend money since there is no collateral and the expense doesn’t improve your creditworthiness in a way vocational training does.

There are many reasons why a loan application might be rejected. Lenders will reject a loan application if your credit score is too low. They’ll reject a loan if they think you lack the cash flow to repay or are mortgaged to the hilt. Lenders also reject loans if they think you’ve lied or if you make too many mistakes on the application. The goal is to steer clear of mistakes and make sure that you are as truthful as possible and make sure everything is in your favor before you apply.

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